Argo Group International Holdings Ltd (ARGO) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four 2007 Argo Group International Holdings Ltd earnings conference call. My name is [Nikita] and I will be your coordinator for today At this time all participants are in a listen only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) This conference is being recorded for replay purposes.

I would now like to turn the presentation to your host for today's call, Mr. Michael Russell, Investor Relations.

Thank you, and good morning. Welcome to Argo Group's conference call for the fourth quarter of 2007. With me today is Mark Watson, President and CEO, and Mark Haushill, Senior Vice-President and interim Chief Financial Officer. We are pleased to have the opportunity to review the company's results for the calendar year 2007 and the fourth quarter, as well as management's perspective on the business. No earnings guidance will be provided in this call.

I would like to remind you that this conference call is being recorded. Following management's opening remarks, the operator will provide instructions on how you may queue in to ask questions. Let me remind everyone that as a result of this conference call, Argo Group management may make comments that reflect their intentions, beliefs and expectations for the future. Such forward-looking statements are qualified by the inherent risks and uncertainties surrounding future expectations generally, and may materially differ from actual future results involving any one or more of such statements. Argo Group undertakes no obligation to publicly update forward-looking statements as a result of events or developments subsequent to this conference call. For a more detailed discussion of such risks and uncertainties, please see Argo Group's filings with the SEC.

With that, I would like to introduce Argo Group's President and Chief Executive Officer, Mark Watson. Mark?

Thank you, Mike, and good morning, everyone. We appreciate you being on the call today. After my opening remarks, our interim CFO, Mark Haushill, will discuss in detail our 2007 fourth quarter and full year financial results before we open the call to questions.

I will lead off the call with some general comments about our 2007 initiatives and performance. I will then comment on the market environment and reflect upon our accomplishments last year and how shareholders might view those achievements going forward. I believe we achieved great things in 2007, and before I go into those more, I would like to say a couple of things about our fourth quarter results. We had two financial charges in the fourth quarter that decreased earnings. Both of these charges strengthened our business for the future, but they did make our earnings this quarter lower than we would have expected, and I think it might not have been clear in the press release that we issued yesterday.

The first of these was the effective sale of a cat bond from PXRE that resulted in an immediate charge of about $3.5 million, but avoided approximately $8 million of expense in 2008. Similarly, we increased our loss ratio [picks] for the fourth quarter of 2007, to increase the conservatism in our [accident] year, which is something similar to what we did at the end of 2006. This change added approximately $15 million of expense for the fourth quarter, and Mark Haushill will have more to say about that shortly.

Let me talk about 2 -- I would now like to talk about 2007 in general. Despite market conditions, the future of Argo Group looks promising because of what we have achieved in 2007. For some perspective on what we accomplished in 2007, I would like to look back 12 months ago. At the time, we reported record results across the board for Argonaut Group, an ROE of approximately 15%, and we were cautiously optimistic about 2007 in the face of increasing market competition. A year later, we have transformed ourselves again. We are now headquartered in Bermuda. Despite marketing softening, we completed another year of top line growth, led by solid performances in our U.S. segments. We changed our name to Argo Group and we have a Bermuda Class 4 insurance company with international reach and a highly experienced team. And last but certainly not least, we further strengthened our balance sheet with a larger and more flexible capital position than a year ago, while increasing book value per share by 15.5%.

The improvements we made in 2007 dramatically strengthened Argonaut Group as an international specialty insurer and better positioned us to take advantage of market opportunities. I would like to take a moment to review of the more important initiatives we completed last year, and highlight their significance as we move forward into 2008. After closing our transaction with PXRE in August, we began the process of implementing the corporate structure that would provide Argo Group with maximum flexibility for capital utilization and deployment across all our businesses. In late December, we announced the restructures of our organization that merged our two U.S. holding companies while combining our two Bermuda reinsurance companies. This served to better align our organizational and capital structure with our business needs as an international organization.

As a result of the restructuring, our international specialty company, Peleus, began 2008 with approximately $1.3 billion in capital, and an A rating from A-Invest, which should allow us to compete effectively in the reinsurance marketplace. We also announced the sale of PXRE's U.S. reinsurance operations, which we expect will close near the end of the first once regulatory approvals are obtained. When completed, this transaction will elimination Argo Group's exposure from business written before 2002, including the long-tail reserves held by PXRE Group. The transaction will all free up additional capital to deploy elsewhere in our business, and further strengthens our balance sheet. Most importantly, Argo Group in 2007 successfully established a unique international specialty insurance platform that will help drive our company's future growth and geographic expansion in new markets.

With this period of transformation behind us, our full focus in 2008 is dedicated to capitalizing on new opportunities for which we are well positioned to pursue. To achieve that, I believe we have in place two very strong leaders who can maximize the resources available to them, and move Argo Group to the next level of success. Overseeing our U.S. segments is Dale Pilkington, who is instrumental in developing our E&S into a market leader, and Andrew Carrier, although new to Argo Group, he is not new to the insurance industry, and I look forward to his knowledge and experience to direct our international specialty segment. I'm eager to watch both of these gentlemen realize this company's full potential.

As respects our 2007 results, I am pleased with our overall performance for the year, particularly given the downward trajectory of the market throughout the last year. In the face of that cross-current, we still achieved top line growth. In a moment I'll ask Mark Haushill to more specifically address the financial results of the fourth quarter.

Let me say a few words about both the balance sheet and the income statement. We have a much stronger balance sheet today than a year ago. Shareholders equity is up 63%, and total assets increased 38% over 2006, mainly as a result of the transaction with PXRE. Most importantly, book value per share rose, again 15.5% per share. With the recent turmoil in the financial markets regarding the creditworthiness of many securities, Argo Group remains relatively unaffected. The company maintains a strong conservative investment portfolio comprised of approximately 90% fixed income, and 10% equities. We do not own CDOs or other derivative securities in our investment portfolio, and during the fourth quarter we reduced our subprime exposure and Alt A exposure in half, from approximately a total of $80 million to approximately $40 million, or representing only about 1% of our total investment portfolio, which stands at $3.6 billion at year-end 2007. As of today, the credit quality of our investment portfolio remains an average of AA Plus. Regarding reserve development, our releases from prior years and reserve additions to the current year demonstrate the level of conservatism this company has exhibited over the long haul. The sale of the PXRE U.S. reinsurance business should close shortly, which will move approximately $135 million of reserves off the balance sheet, and provide us with additional capital flexibility.

Moving to the P & L, I'm pleased that we were able to produce an increase in gross, net and earned premium volumes during 2007, helping total revenue reach the $1 billion level for the first time in our company's history. We achieved that milestone while continuing to follow our disciplined underwriting philosophy, and delivered profitable margins. Our biggest challenge going forward will be expense management, as we absorb the expenses associated with PXRE, and we expect to move our expense ratio in line by the end of 2008. Our excess and surplus line segment produced record underwriting results in 2007, despite slightly less gross written premium volume. We believe some E&S business, once written during the hard market, has found its way back to the standard marketplace, and that new market entrants are taking business either through lower rates or a loosening of terms and conditions as they enter our marketplace. Having said that, we continue to focus on profitable margins and our specialty E&S platform.

Our select market segment performed very well in 2007, setting records for premium volume and profitability. Underwriting income was up 19% year-over-year, and select markets' combined ratio improved to 88.7 from 89.4 in 2006. We believe this momentum can continue into 2008, as the niche programs we have implemented over the last few quarters hit full stride and the pipeline continues to produce new opportunities.

Finally, our international specialty operations are up and running, and our team, headed by Andrew Carrier, is energized for the upcoming renewal period. I'm pleased to report we achieved our goals for the January 1 renewal period, and through our restructuring have dedicated the capital resources from which to grow, all during a period when property cat rates remain attractive. I look forward to watching our newest Argo Group business reach its full potential as the 2008 renewal season unfolds.

Regarding the marketplace, we saw our rates decline approximately 5% for the year of 2007 over 2006. The marketplace for specialty companies is continually under pressure from both new entrants and standard market companies that are loosening their underwriting guidelines, and we're typically able to maintain our underwriting and pricing discipline on smaller risks. However, competition for the larger accounts is quite fierce, something that you've heard me talk about before, with erosion on both price and on terms and conditions. As a result, to go forward and grow this year organically, we'll be looking at significantly more submissions this year just to write the same number of accounts, in order to sustain our top line growth.

Before I turn the call over to Mark Haushill, I wanted to address what I suspect many of you are acutely interested in, our capital position. Let me share with you our approach for determining how we deploy capital. Now that we have reorganized the company, which optimized our capital structure, our focus is on the best use of our available capital in 2008. Having said that, our capital priorities are the following. One, to support the loss reserves of our balance sheet, and other items on our balance sheet. Second, to support the growth of our core businesses. Third, to pursue attractive market opportunities that complement our existing business lines. And finally, to repatriate capital either through a share buyback program or dividend, depending on our capital position and stock evaluation. We have a number of opportunities in front of us in 2008, and while we've been talking about them [for] some time, I think we will finally have an opportunity to use our capital productively during 2008, as more opportunities present themselves.

The last thing I would say before I turn the call over to Mark Haushill is that we have made a lot of progress on our CFO search since the last conference call, and I'm hopeful that in next few weeks that search will come to conclusion.

With that, I would like to turn the call over to Mark.

Thank you, Mark, and good morning. I will add to Mark's comments with additional details about the quarter's results, and then we'll take your questions.

Pretax operating income for the fourth quarter was $38.7 million, a 4.6% decrease from the fourth quarter of 2006 of $40.6 million. Earned premium increased 8% for the quarter, mainly reflecting moderately increased reinsurance retentions during the past 18 months. You will recall, during 2006 we had started to increase our retentions in the marketplace. Gross premium was down 11%, driven largely by the E&S segment facing market conditions and the impact of a select markets large account written in the fourth quarter of 2006, which had a 17-month term. Normalizing for this account, gross written premium was down only 4.2%. Loss ratio selections for 2007 are slightly higher than in 2006, reflecting rate decreases which were in line with our overall expectations. Prior year loss reserves continue to develop favorably. Development for the quarter was a favorable $36.1 million, comprised of about $21.9 million from E&S, and [$13.5] [audio dropout] from the select market segment. For the fourth quarter of 2006, favorable development on prior [accident] years was $28.6 million, primarily coming from the E&S segment. Our [property] reserves for KRW are developing in line with our expectations, and for the quarter we did not recognize any development.

To talk a little bit about our expense ratio, it was 38.3% for the quarter versus 35.4% in the fourth quarter of 2006. The increase in 2007 is due to the costs associated with the infrastructure assumed in conjunction with the PXRE transaction. We will continue to experience a higher expense ratio until our international specialty business reaches critical mass, and the sale of PXRE insurance company closes.

Investment income increase 46% to $40.5 million for the quarter, primarily due to increase -- to the increase in vested assets associated with the PXRE transaction. Interest expense also increased, with the addition of $166 million in trust-preferred debt associated with PXRE, and the $58 million borrowed under our credit facility to fund the special dividend. With recent interest rate movement, we expect a decrease in interest expense for 2008 as compared to 2007.

As Mark talked about, during the quarter we reported a $3.5 million charge on the disposition of the A&W catastrophe bond. The effective tax rate for the quarter was 38.7%, due to operating losses experienced by our offshore entities as they build critical mass. We expect the effective tax rate for 2008 to be in the upper 20s. The required regulatory approvals for the sale os PXRE insurance company are proceeding, and we expect to receive these approvals in the next 60 days. These assets and liabilities which will be sold are segregated on our year-end balance sheet and classified as held for sale. This sale removes the risk associated we legacy loss reserves, and will moderate the expense associated with the PXRE transaction.

The advancement portfolio was $3.6 billion, and had a pretax unrealized gain of $122 million at 12/31. The current fixed income portfolio duration is 3.1 years, and the credit quality of the fixed income portfolio is AA Plus. The yield of the fixed income portfolio was 4.7%. We have managed our portfolio conservatively and have not been adversely affected by many of the recent market conditions. We have approximately $440 million of investments that are wrapped by the monoline bond insurers, consisting almost entirely of municipal securities. We and our investment advisers examined the underlying credit of the wrapped bonds, and we are comfortable with the quality of these investments despite the challenges facing monoline insurers. The muni market continues to offer good returns, and our strategy looks at the credit quality of the underlying municipality, not the bond insurer. Our leverage ratio was 21%. We're comfortable in that range, and believe we have additional debt capacity.

With that, Operator, that concludes our prepared remarks and we're ready for questions. Operator, I'm sorry, this is Mark Haushill, we're ready for questions.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Amit Kumar of Fox-Pitt. Please proceed.

Good morning. I guess just starting with Peleus Re in year opening statements, I think you mentioned it's within your goals. Can you just give some more color on that?

During the course of 2008, we expect that we'll write about $100 million of premium, and that's going to come in part in the first quarter, in part in the second quarter, and then the last piece in the third quarter will be July 1. Most of the business that we plan to write will be between April 1 and July 1. I -- there will be a bit more business that we may bind in the first quarter as well, but my guess is that we'll write somewhere between 20 and $30 million in the first quarter.

Okay. I guess moving on to the reserve releases and the uptick in the underlying accident, your combined ratio, I guess, you know, if I look towards '08, would it be fair to assume for modeling purposes perhaps maybe a 103, 104 combined ratio? Do you think that's the right way to look at it, or do you think it's more of an aberration in Q4, because you have usually trued up results in -- at that time?

It's Mark Haushill. I don't know how you get the three digits. I'm not sure how the math works there, but let me see if can give you some additional color. Typically in the fourth quarter, after writing - about 80% of our business in the U.S. is casualty based, right? So our process is one where we look at the overall year in light of market conditions and rate, and to the extent that -- that market conditions warrant, we tend to increase our current accident year, and we did that in the fourth quarter of 2006, and we did it to the tune of about $20 million in 2007. Now, that's not -- it's not like there's a lot of indication or bad news in the loss ratio trends at all. We're just trying to anticipate a deteriorating market condition. So I don't know how you get to three digits, and so I guess my answer to that would be no.

Okay.

I think it -- I think that notwithstanding our conservatism in the fourth quarter, that the current year loss ratio selections that you saw for the first three quarters of the year will actually be very similar in the first quarter of 2008. If they increase, it should be slightly, and I would define slightly as 1 percentage point, perhaps two at the very most.

Got it. That is helpful. I guess just moving on to the D&O exposure, I might have missed this in your opening statement, but do you have any D&O exposure from financial institutions or perhaps mortgage brokers?

Based upon our in all knowledge right now, we have no D&O exposure to the brokers, and we don't write D&O, so it is unlikely that we will have any exposure beyond the exposure that we have in our investment portfolio.

Okay. Got it. That's all for now. I'll re-queue. Thanks.

Thank you.

And your next question comes from the line of David Lewis of Raymond James. Please proceed, sir.

Good morning. Thank you. Mark Watson, I may have missed it earlier, I got on late, but the M&A side, are you seeing activity pick up, are you seeing pricing become more rational, and where is your focus going to be? Is it going to be both on underwriting as well as agency acquisitions?

We are seeing a -- I guess the answer is, our focus will be on organic growth first, but given the challenging pricing conditions in the market, we're more likely to see growth from our business development activities, which I would include both M&A and business partnerships that we have with a number of agents around the country that keep coming online, and so of those may be -- may be program opportunities, but most of them are just general relationships that involve books of business, and the average size of those books is 20 to $40 million, which is a good size for us. We certainly look at smaller things, and occasionally larger things, but the sweet spot for us is really about 20 to $30 million. The pricing for acquisitions is improving, even more so than when I had talked about it three months ago, and a lot of the things that we've been working on for the last couple of years we're getting near the end of, and I think that in 2008 we'll have a chance to talk about a few opportunities during the course of the year. The things that we're looking at are all within our strategic direction, so I'll call that [adjacency] growth. The add to our distribution platform, they add to our product portfolio, they give us a bit more geographic spread. Most importantly, the things that we're looking at increase the market presence of the markets that we're already in. There's plenty of opportunities to do things other than that, but we're fortunate that we have enough strategic opportunities in front of us that I think that the 2008 will actually start -- we'll start to see some progress, and, of course, that will allow us to use our capital more effectively than we are now. And at some point during the year, we'll have to see how those opportunities are going and what we need to do on the capital repatriation front.

That's helpful. And regarding the rating upgrades from A-Invest for Peleus Re and Argonaut Great Central, do you think you're going to get, more importantly, much impact from that rating upgrade for the Argonaut Great Central?

Well, as a matter of fact, yes. And I was really surprised, because that's mainly a small account-driven business, but what we found in the marketplace is that because the other Argonaut Group companies were rated A, and Great Central was rated A minus, there was some perception in the marketplace that Great Central may be less secure than the other companies, and so this will allow us to write some business that we might not otherwise have. And it's a huge impact on Peleus. In this marketplace, which has become more competitive, having $1 billion in capital and an A rating from A-Invest are significant hurdles to get over in writing the business that you want to write, so it gives Andrew Carrier and his team an opportunity to have first look at business and not just be a participant in a subscription marketplace.

That's helpful. And lastly, Mark Watson, for you, you indicated rates were down 5%. Can you maybe break that down between E&S and select markets?

Rates were down a little bit more on -- Mark is grabbing our rate sheet while I'm talking. Rates were down a bit more on E&S, but that's a bit misleading, because the places we saw rates coming down were some of our professional liability programs where we had fairly substantial margin to give up. And so there we saw double-digit rate declines of 10 to 15%, and in a bit of our industrial casualty accounts, again where we had good margin, we saw rates coming down a bit over 10%. But for the to most part, our businesses -- our rates were down in the mid-single digit range.

Okay. That's helpful.

Sorry, and that's true for select markets, as well.

Okay. And Mark Haushill, just a quick question, you indicated that interest expense ought to be down a little bit, just given the interest rate environment versus '07, but I think you took on some more debt with the PXRE acquisition. Could you maybe give us a range of where you think that might kind of come through on a quarterly basis or annual basis in'08?

That's a good question, David, but if I can et me go back to something you said earlier. I think this he help you in terms of when Mark was talking about the traction we got on the M&A and our alliances that we have, just to give you a data point, a public entity that is contained with the select market segment last year wrote give or take $74 million, and this year wrote over $100 million. And that's a result of the relationships that Mark was talking about earlier. If that helps you?

It does, thank you.

Good question with respect to the interest rate. What I was trying to convey is that the average interest rate, or the effective rate on the debt that we have outstanding, will be decreased in 2008; as we all know, and rates are down. So if you're looking at an average of mid-8 for the fourth quarter, we're looking at probably mid-to-low 7s for the first quarter of '08. Does that help?

Yes, it does. Thank you very much.

Sure.

And your next question comes from the line of Bijan Moazami of Friedman Billings. Please proceed.

Good morning, everywhere. I have a number of questions. You might not be able to answer all of them, but the first one, once you sell the PXRE domestic operation, how much cash do you anticipate to have at the parent company, and when you have that cash, if you could go through the priorities you have, whether it's to pay back some debt, buy back shares, or M&A, just list the priorities that you have from one to maybe four or five.

Cash that comes out of the sale of the PXRE U.S. company will be approximately $125 million.

And that includes the dividend.

Sorry, that includes the dividend we will be making at the same time, so to the total cash from dividends and sale proceeds is about $125 million.

And how much do you have right now?

Excuse me?

At the parent company?

Well, that's what I was getting to.

Right.

This -- that -- the sale proceeds don't go to the parent company. They go to the U.S. holding company. And then we have to decide whether we should be redeploying that capital within the U.S., or dividending that capital up to Peleus, the reinsurance company, which owns the U.S. holding company, or ultimately up to the parent company. As respects to the priority of capital use, it's no different than what I talked about a few minutes ago.

Okay. Mark Haushill, if you can expand a little bit more. I didn't quite understand the second charge that you took, the $15 million. If you can expand a little bit on that and also on the sale of the cat bond. It's a little bit vague to me exactly what those two transactions were.

Okay. I'll go in reverse order. We effectively sold or laid off the cat bond to another third party, and in marking to that market, the accounting rules require you to do just that, mark it to market, and we recognized a $3.5 million charge, and that's contained within interest and other on the income statement. Does that help on that one?

Okay. That's great.

I think when you said on the 15, you're talking about the development and/or the current accident year? Is that what you're talking about?

Right. The second one, it was kind of vague, I didn't quite understand what you meant in your prepared remarks.

Yeah, I apologize. Our process is one whereby, once the year is completed, as typical in the industry, we do a detailed actuarial review, okay, of all lines of bus - we do it every quarter, but it's more detailed at year end. That contemplates all of the market conditions, the tail on the business, the nature of the business, and frankly I make a recommendation as to what I would do with respect to the current accident year, and typically, in light of market conditions, or certainly in the last two years, we have added to the current accident year in terms of loss reserves. The fact of the matter is, the number that I added in 2006 proved to be too high, to - the strengthening we did in 2006 was too high. Not saying 2007 is going to be too high, but we're conservative as respects to our current accident year due to the tail of the business. Does that make sense?

Okay. So basically you' released from '06 and prior, and you added to the '07?

Bijon, the $15 million number that you asked about was actually 20. In my remarks, I had said 15, but it was actually 20, and Mark classified that in his remarks.

Okay. Great. Thank you.

Sure.

And your next question comes from the line of Doug Mewhirter of Ferris, Baker Watts. Please proceed.

Okay. Good morning. Two questions. The first, I guess, goes back to just to -- so I'm perfectly clear on the different moving parts of your loss expenses, so you had $35 million of prior development, prior-year favorable development, and you sort of topped up $15 million of current accident year. So --

20, Doug.

Or 20, I'm sorry, so am I correct that the total, I guess, net movement would be 15 favorable, in which to maybe construct an accident year loss ratio for modeling purposes? Or is that over-simplifying it?

I guess what I would say is that's one way of doing it. What I would do is I would look at the first three quarters of the year as respect to the accident year, and then use, if you will, the fourth quarter as a little bit of an outlier. Mark?

I think if you're looking about what our loss selections will be - loss ratio selections for the U.S. business will be in 2008, I think the first three quarters of the year are far more instructive than the fourth quarter, and if you wanted to be conservative, you might increase your loss selections by one or two percentage points. I think that's the best way took to look at 2008 prospectively.

Okay. That's very helpful. Thanks. And I guess the second question is more of a, I guess, a reporting question. Well, first of all, when you say that Peleus may write $100 million of premiums, is that all third-party business?

Well, that's all business, yes, sorry, that's all third-party business.

And then non-Argo Group business?

Correct.

Okay. My second question would be, do you anticipate any internal business being done with the E&S or select markets, and if so, would that be reported as a deduction from -- you'll see the gross -- there would be higher ceded premiums from the E&S segment, and a high net number from Peleus, or would you kep it - how would you break that into segments, I guess I'm saying?

Let me answer the first part, and I'll ask Mark to be more precise in the second part of the accounting treatment. We do with -- given the reorganization of the company at year end, in order to enhance our international operation's ability to write business, Peleus will -- Peleus, you know, over time, and quite quickly, will have more capital than in the U.S., and in order to support the underwriting business in the U.S., Peleus will reinsurance some of the business in the U.S. to provide the U.S. with capital. We began doing that in October of 2007, and I -- and we will increase the amount of that quota share as the capital in Peleus increases during 2008. Also, in 2008, the quota share that we have with HCC expires as of March 31. On April 1, Peleus will assume the position of HCC in that quota share, again providing capital to our E&S operations. We believe that the quota share in 2008 will be somewhere between 30 and 50% of the business - or the premium written and earned in the U.S. operations. Mark, do you want to talk about the accounting treatment?

Sure. And that's a good segue, Mark. Doug, the accounting rules in terms of how you report segments will mandate, if you will, that the business that's written in those segments, and then ultimately ceded to Peleus will be shown in the segment in which it is generated --

For accounting reasons in the [Peleus] transaction.

Correct. Does that make sense, Doug?

Okay. So I guess more directly, so the -- you'll see a -- so you're saying that there will be a lower net written number in the E&S segment, for example, or it would be a higher one than you would think, even with the internal transaction?

Actually, the way to look at it, Doug, in my view, would be you would not see, in the release, or in the segment reporting, any difference. I mean, it's not going to show up as a [cession] in terms of it would within the segments.

Okay. Okay.

So in your example, ceded premium for E&S will not reflect the quota share.

Okay. That clears it up. Thanks. That's all my questions.

Sure.

And your next question comes from the line of Robert Farnam of KBW. Please proceed.

Good morning. Most of my questions were answered, but I had one on the reserve development more specifically. What lines of business were they -- basically, I know that the majority of your business is casualty lines. What lines of business was that coming from, and what accident years in particular? Was it more recent accident years?

Are you talking the favorable development, Bob?

Yes.

Primarily '06 and prior, and most all of it was in casual lines. There was a pretty -- over $10 million of favorable development in our workers' comp line within the select market segment, and that all related to prior accident years. Okay?

Okay. But mostly was the majority from '06, or was it earlier years than that?

I would say mostly prior.

Okay.

More '05 and prior than '06.

Okay. That it. Thanks.

Your next question comes from the line of Kenneth Billingsley of Signal Hill. Please proceed.

Good morning. Just a -- some follow-up questions. On the tax rate in general, I believe you were saying that you expect it to be in the high 20s? Is that correct, for 2008?

Yes.

And then moving on to -- on the interest expense side, it looks like the interest expense jumped from, you know, 6 to $12 million. $3 million, that's related to mark to market on the cat bond, is that correct, to drop it down do about $9 million?

That's correct.

It was 3.5, Ken, sorry.

3.5, so just under 9. What is the debt outstanding in the quarter?

There's 166 of trust preferred that we assumed in the PXRE transportation, 144 at the -- what I would call the Argonaut Group, and we had borrowed $58 million to fund the special dividend.

So about 368? And you're saying that's about -- the expectation is about 8% in 2008?

I would say a little bit lower than that.

Little bit lower than that. And the reason I ask this, if I use 8%, and maybe I use below, what was the effective interest rate in the quarter then on the $370 million?

Well, there's a whole lot of trust preferred pools in there. I mean, I can give you an average, it was in the upper 8s, Ken. And we would expect it in the fourth quarter of 2007 to be in the upper 7s, or lower.

Okay, great.

They reset pretty soon.

They reset pretty soon. Okay. The last question I have is just a comment I believe you made a little bit earlier, talking about your investment portfolio, and I may have misheard this, but you may be shifting towards, or doing more on the muni side, as you - more assets, fixed investment assets, are in the Bermuda operations, will you decline the use of -- or lower the amount of muni investments that you are making?

Ken, I don't think that's what I said. If that's what I said, I should clarify. We have, over the last 18 months to 2 years, deployed assets or free cash flow in [the munis]. I don't think we would be doing that to the extent that those invested assets are being built up in Bermuda. Does that make sense?

Very good. That clarifies my question. Thank you.

Uh-huh.

And your next question comes from the line of Mark Lane of William Blair. Please proceed.

Good morning. Just one question regarding the accounting within the international specialty, whatever it's called. How much residual premium is still on the books that will be earned this year? I was a little bit surprised there was so much earned premium in the fourth quarter.

Well, when you say residual premium, I think you mean PXRE.

Yeah, whatever you're not writing as of --

The answer is there's no no residual from PXRE. What you see is that we reclassified some of the quota shares that we had previously in another segment to put them into the international segment, which was more in line with how we run the business.

Okay. So that's why you're not seeing any corresponding written premium, because it's prior periods? Is that accurate then?

Mark, I'm not sure I understood the question, but --

Meaning you're just reclassifying some earned premium on written premium from prior quarters?

That's right. There was very little business, new business written in international specialty, other than the quota share business that was reclassified.

Right. So do you have any idea of what -- how much of the reclassified business would be earned this year?

You mean in 2008?

Yeah, in 2008.

I think in 2008, we will not renew all of the quota share lines that we had. My guess is that we'll write about $20 million worth of premium in 2008, give or take $5 million, and given how it flows during the year, probably 75% of that is earned in 2008. Does that sound right, Mark?

Yep.

And that's part of the $100 million then, or --

No, that it separate and -- part. I'm sorry, Mark, that's separate and apart. Good question.

Okay. And so why would the underwriting expenses be lower this quarter than last quarter in Peleus, for the way that you segmented the -- segmented the international specialty, but the absolute number was down.

The absolute number in international specialty was down is what you're saying, right?

Yeah, the underwriting expense number.

Well, the underwriting expense is there, again to Mark's point, are related mostly to the assumed programs that we've got. Does that make sense? And I believe -- I believe there was a true up prior, and so I guess what I would say is the underwriting expenses for this quarter are probably more representative of what we'll see.

Okay. But all the extra infrastructure, et cetera, is all in that segment, right? When you're talking about elevated expense ratios in the near term, as we suit of ramp this business up, this is the segment we're talking about, right?

Some of it is allocated, Mark, and some of it is not. Some of it is a corporate expense that we keep at the holding company that is not allocated to international specialty.

Okay.

That's something that we're looking at right now, how we -- how we're managing out those expenses and those that remain, where they're allocated.

And Mark, that's a good point.

I think we'll have better color on those expenses on the next conference call, to be honest.

Okay. All right. Good enough, thank you.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Mary [Schafer] of Morgan Stanley. Please proceed, Miami.

Good morning. Gentlemen, you've had a fair number of moving parts in your earnings over the last couple of quarters, and I'm hoping that you can just help me think about what a normalized earnings number is going to be for you for , say for

Sorry for the pause.

That's okay. If you're coming up with an answer, that's great.

Well, I'm afraid the answer is going to be a nonanswer, because there are still a couple of moving parts, and let me go down the list.

Okay.

The -- where we come out in 2008 will in part depend upon market conditions in the United States, particularly as they affect our E&S business. So I -- I think that our -- you know, we'll be pleased if our E&S business stays about where it is. As I mentioned earlier, we do have more opportunities that are coming online right now for our select markets business, so I think that we should expect to continue seeing growth in select markets. I believe that we are on track for our international business, as I mentioned earlier, but the reinsurance marketplace is becoming more competitive. We have to pull some expense out of the organization during the year. Some of that will come out from the sale of the PXRE operation. And as respects utilizing our capital, we do have a couple of business development opportunities that we don't know exactly when they're going to happen, but they -- we believe they will happen, and those will create more moving parts again. But I think that if you look at, at least from a U.S. perspective, the run rate for the first three quarters of the year, I don't anticipate much change in 2008 beyond those items that I mentioned earlier in the call, and I think we'll have a pretty good picture after the end of the first quarter of 2008 what the international operation is going to look like, and also what will or will not happen in the business development pipeline.

Okay. Very good. If I could just follow up quickly. On your international business, was the sale of the cat bond the last cleanup measure you needed to do in Bermuda?

Yeah, I believe so. Other than the -- in Bermuda, yes. There may be some slight overhang from the sale of the U.S. operation, but for the most part, yes, I think it's now us moving ahead, and just writing business.

Okay. Very good. And then you mentioned some expense will come out with the sale of PXRE. Do you have a number how much that's going to be, that just goes away with that sale?

Well, at this point, I'm not sure exactly how much is going to go away. Some of the expense is going to be -- is going to be deferred by the seller, assuming a portion of the operating expense of our operation, and we're in the process of negotiating that right now. In other words, we'll be providing them with a fair amount of runoff service prospectively.

Okay. Very good. Thank you very much.

We have a follow-up question from the line of Amit Kumar. Please proceed.

Thanks. I guess, just going back to Mary's question, previously, you know, I think we've gotten an indication that perhaps you can achieve a mid-teens return on equity for '08. is that still an achievable goal, or has something changed on that number?

Well, I think what I -- what I think what we said previously was that in 2008 we would be on a path to get to 15%, and that it would be more clear as the year progressed. I think that that is still the case. A lot of it depends upon the general market conditions, whether or not there are any catastrophic events during the year, and whether or not we're able to effect our business development activities that I keep referring to. And we do need to manage our expenses. So I think that as each quarter goes on, more of those -- more of the financial results ought to start moving towards a double-digit ROE, and, of course, we do have some capital, but if we -- if we cannot use on the business development front, which is our number one priority, then we will repatriate that back probably through share repurchase during the year, and it's worth noting again that the board has approved a $150 million share repurchase program for us to use during the course of the year when we think appropriate.

Okay. I guess just moving on, if you go back to November of last year, I think there were some, you know, management departures, some promotions and realignments. Should we expect any more of, you know, management reshuffle going forward, or do you think right now you're satisfied with the structure, you know, as to how it looks right now?

Well, I'll certainly be a lot happier once we bring on our new CFO. During the course of the year, it's possible that we will add one or two positions, but I don't think that we'll see as much change at the corporate level that we've seen over the last six months. So, yes, I think that part is done, and as we have promoted people within the organization, that's left openings deeper in the organization that we're now filling.

Got it. Okay. My final question. In terms of the results release number, is that a net number, ie, were there some moving parts that perhaps there were some additions somewhere, or is that a clean reserve release number?

The $38 million was just reserved releases, so you then offset that against the $20 million that we increased the current accident year by, so the net number is about $18 million.

Got it. Okay. Very helpful. Thanks so much.

We have a follow-up question from Kenneth Billingsley of Signal Hill. Please proceed, sir.

Yes, one is a follow-up to his question on the promotion. In the fourth quarter, there were a number of senior level promotion and hires. Can you just discuss how many of those were new positions, and maybe how many were actually replacing people that left the firm?

I don't think we had any new positions during the quarter, with the exception of John [Kearning], who is now the Head of Strategic Planning. All of the other positions were already a part of the organizational structure, and the individuals that have filled those roles are -- are -- were already in the company on the U.S. side. And then on the international side, we have one more position to fill. We know -- we already know who the candidate is. We'll be announcing that during the first quarter, and then that will round out Andrew Carrier's team.

And you may have explained this in the past, but would you just discuss the reasons for - in the U.S. operations, like how it doesn't fit into the plan, and the reasoning behind that?

Ken, I'm sorry, but your question broke up. Could you repeat it, please?

The question just about the selling of the operations, the reason for selling it, and the reason it doesn't fit into the overall plans that you have for Argonaut?

Right. So the company was in runoff; we already have 11 statutory insurance companies in the United States and didn't need another one, and then lastly it had reserves on its balance sheet that made a number of our constituents uncomfortable, particularly the older, longer-tail casualty reserves. And somebody was willing to pay us a price that we thought was fair, and it frees up capital immediately for us to use and redeploy, instead of freeing it up over time as the loss reserves run off. That was was probably the biggest reason.

Great. Thank you.

This concludes our Q&A session. I will now turn the call over to Mark Watson for closing remarks.

I would like to thank everyone for being on the call today. As we have discussed, a number of things happened in 2007, the majority of them very positive, and we could not have been able to do that without the dedication of all of our employees and our business partners, and so I want to just take a minute to thank everyone involved in Argo Group for all of their hard work and effort over the last year. We still have a lot of work to do in 2008 to actually achieve the potential of the business platform that we've put in place, but I believe that we're on track to do that.

I just want to summarize a couple of takeaways from our discussion today. The 2007 merger of Argonaut Group and PXRE has provided Argo Group with a diversified international specialty platform that provides a very broad geographic reach. The recent corporate restructuring maximizes our capital flexibility and operational efficiency, which we'll see in 2008. The corporate restructuring led to the development of a high-rated, well-capitalized international reinsurance platform, which we're now able to capitalize in the reinsurance marketplace first. Argo Group's core business in the U.S. remains strong, achieving top line growth and profitable margins during 2007 in a very competitive marketplace.

The management team have now been together over 7 years, and we have a very experienced team below the corporate team running each of our businesses. And I think that while we are still ROE challenged, given the amount of additional equity that we've added, that we are in a good position to be able to use that capital effectively over the course of this year, and I look forward to talking to you all again after the end of the first quarter. Thank you again for your time this morning. That concludes my remarks, Operator.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.