Argo Group International Holdings Ltd (ARGO) 2008 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the fourth quarter 2008 Argo Group International conference call. My name is Tonya and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Mike Russell, Investor Relations.

Thank you, Tonya, and good morning, everyone. Welcome to Argo Group's conference call for the 2008 fourth quarter and full year. With me today is Mark Watson, President and Chief Executive Officer, and Jay Bullock, Chief Financial Officer.

We are pleased to have the opportunity to review the Company's results and provide 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 and all participants are in listen-only mode. 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 and are 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 Mark Watson, Chief Executive Officer of Argo Group.

Hello to everyone. We appreciate that you've taken the time to join us today. I'll lead off the call with some general observations regarding 2008, comment on the environment from a capital and pricing perspective, reflect upon what we accomplished last year and provide some perspective on why we believe those actions will manifest positive results ahead for Argo Group.

After my opening remarks, our CFO, Jay Bullock, will provide additional details on our financial results for the fourth quarter and year ended December 31. After Jay's comments, we'll open the call for your questions.

So let me begin. For property and casualty insurers, it was hard to believe so soon after 2005 that we'd face another anomalous year. Recall that in the second quarter of 2008, more than a dozen serious weather events destroyed properties in the U.S.. As we rolled into the second half of the year, two hurricanes, including Ike, hit the Gulf Coast region, damaging property from Texas to the upper Midwest. All told, Ike is one of the most costly hurricanes in U.S. history.

Finally, as 2008 entered the fourth quarter, we witnessed another type of catastrophe, a collapse of the financial and credit markets.

As with most companies in our industry, Argo Group was affected by each of these events. I am pleased to report, however, that we weathered the storms and market turmoil, and our business remains strong as we enter 2009. Moreover, what we achieved in 2008 ideally positions Argo Group to capitalize on the future. I will comment more about the market environment in a moment.

Let me just make a few comments about the 2008 consolidated results. Despite the market challenges I just mentioned, our 2008 financial results remain solid. In fact, we were able to grow pretax operating income from $113.9 million in 2008 -- excuse me, in 2007 to $121.5 million in 2008. And despite the soft market and increased competition in many of our lines of business, our Company's diversified business platform, which we built both organically and through acquisitions, allowed us to grow our business.

In 2008, gross written premiums increased by nearly 36%, revenue grew by about 26%, and operating income was up 7%.

During 2008, our businesses maneuvered carefully through the softening market, maintaining our underwriting discipline. Intense marketplace competition continued to impact parts of our excess and surplus lines segment, yet we were able to produce operating profits for the year of approximately $98 million with a combined ratio of just over 93%.

With Trident's strategic acquisition of New England's leading public entity insurer, Massamont, our Commercial Specialty segment increased gross written premiums by 21% and continues to be a strong contributor to our bottom line.

Our reinsurance segment performed to plan, generating operating income of nearly $25 million in 2008. We see additional upside at Argo Re as reinsurance rates firm.

And finally, since June 1, our International Specialty segment became part of Argo Group. Unfortunately, they're heavily-weighted property book was impacted by Hurricane Ike and other attritional losses, resulting in a $5 million operating loss in the last seven months of 2008.

While we reported decline of 2.5% in book value per share, which normally would be very frustrating, but given the current environment -- given the current environment, I can't complain too much and I should also say that our balance sheet remains strong as we enter 2009, with invested assets increasing to approximately $4 billion.

I'd like to talk about our business platform for a minute. During 2008, we moved into the early stages of a much stronger position for 2009 than we were in before. Last May, we acquired the final piece to our International Specialty platform, adding a Lloyds syndicate that gave us a strategic presence -- or I should say a more significant strategic presence -- in the London insurance marketplace.

With our presence in the Bermuda and the U.S. markets, our broader geographic breadth allows us to offer Argo Group's product suite to the entire specialty insurance distribution network, which, from a strategic perspective, we view as a single converging marketplace.

In our optimism about the Company's diversified infrastructure, I should mention that parts of our platform are still in the early stages of development. Needless to say, we believe our platform's full potential is yet to be realized.

In Bermuda, our reinsurance team, led by Argo Re President Andrew Carrier, just completed their first year of full operations, writing about $100 million in business and delivering nearly $25 million in operating profits, notwithstanding the significance of Hurricane Ike.

Our newly acquired London operation, in only seven months as an Argo Group company, wrote approximately 200 million -- $280 million of business, but as with many of our fellow Lloyds peers with property-exposed books, 2008 resulted in a higher frequency and severity of large market losses related primarily to Ike and Gustav. It now appears 2008 was the second most costly year on record for the insurance industry, exceeded only by 2005, which included Katrina, Rita, and Wilma.

In a typical accident loss year, we believe our Lloyds operation going forward will deliver returns closer to what it produced in 2007, when Heritage generated margins in excess of 20%.

Not surprisingly, our international platform is generating recruiting benefits as well. With Argo Group's extended reach, we have been attracting very talented and experienced people who can bring additional capabilities to our underwriting portfolio. Candidates we interviewed have expressed an interest in joining the early stages of our expanded platform. They look forward to participating in strategy formulation, having a tangible impact on results, and sharing in the benefits of long-term success.

There's no better example of how our new platform has attracted talent than at Argo Re, where Andrew Carrier, in his first year, successfully led his very capable underwriting team as they built our profitable reinsurance book from scratch.

Also, just recently, we appointed Nigel Mortimer to head up Argo Re's newly established casualty and professional risks business, and named Neil Chapman as our new joint active underwriter at Heritage. The addition of these gentlemen and others to follow reflects the market strength of our international platform and is a strong indicator of the leverage we now enjoy in the specialty underwriting markets as well.

Let me talk about the underwriting environment for a minute. Regarding the property and casualty marketplace, many are projecting a return of the hard market in 2009. Given last year's catastrophic events and the state of the capital markets, one would think a hardening of rates would be a safe assumption. While there are signs that pricing in some areas has stabilized, any improvements -- improvements seem to be materializing slowly and thus far have been confined to the property and reinsurance markets.

As 2008 came to a close, casualty pricing had not yet improved and many -- and may remain flat until the scarcity of capital is realized, which may take time to work its way through the markets. As it does, we believe the permanent reduction of available capital resulting from last year's hurricane and investment portfolio losses will eventually constrain capacity, resulting in higher rates. How soon that happens is tough to predict, but we do believe its occurrence is inevitable.

Should the hard market return, Argo Group is much better positioned to capture its potential benefits, more so than we were a few years ago. We are confident that when presented a piece of business, we can now offer our agents and retail brokers the broadest possible product portfolio through the broadest possible distribution network, including the U.S., Bermuda, and Lloyds. We believe this breadth and depth differentiates Argo Group from most of our competitors.

Let me say a few words about capital. Given the financial and catastrophic losses sustained by our industry last year, the amount of excess capital is far less today than a year ago. In the current environment, we recognize that capital is scarce and costly if needed. Therefore, any new capital that becomes available would likely gravitate to those companies with prudent results.

Otherwise, available capital will continue to be rationed. Eventually, the impact of capital constraints will be the primary factor in the hard market's return, as well as increasing loss costs.

Looking ahead, we believe Argo Group has the capital resources necessary to execute its business plan for 2009. Those resources include the growth capital needed to support our newest business units as they pursue opportunities in their respective markets.

So if I could just say in summary, given the turmoil last year in the insurance and financial markets, Argo performed well by remaining profitable, growing our operating earnings, and strengthening our infrastructure. In 2008, we completed the buildout of our International Specialty platform, which gives Argo Group a differentiating advantage among our competitors and strengthens our ability to serve the specialty marketplace and grow our business.

Our business platform ideally positions Argo Group to take advantage of the anticipated hard market, and on a much broader scale than in the last market cycle. The potential of our new platform is attracting talented and experienced personnel that will help us grow in new and existing lines of business.

Finally, we believe Argo Group has the capital resources necessary to fulfill our 2009 business plan, including the volume of business projected to be underwritten by our newly-created business units.

Now I'll turn the call over to Jay, who will review our financial results in more detail, and then open the call up for questions.

Let me go over and add some more color on the fourth quarter and full-year financial results, and after that, as Mark said, we'll take your questions.

As Mark mentioned, 2008 was a challenging year for the industry, impacted by significant storm activity, global property losses, and the continuing turmoil in the capital markets.

Despite this challenging environment, we reported for the fourth quarter and year -- end year pretax operating income of $38.7 million and $121.5 million, essentially flat for the quarter but up 6.7% for the year.

As we finished the year, we are again pleased with the firmwide risk management efforts, which allow us to report book value per share of $44.18, down only 2% from the end of 2007. We enter the new year with a solid capital base and a platform that allows us to direct capital to the most attractive opportunities.

Our topline continued to advance during the quarter with net written premiums up 27.5% over the same period last year, largely a result of the additional premium from our International Specialty segment.

For the year, our net written premiums increased 34.7% compared to 2007, driven primarily by the acquisition of Massamont in our Commercial Specialty segment, the launch of Argo Re, and the acquisition of Heritage.

As Mark noted, the marketplace remains challenging and our insurers are increasingly -- are facing increasingly difficult economic conditions. Our approach has been and will continue to be selective expansion, where conditions are most attractive, and through acquisition, where businesses are added to our platform.

Turning to our underwriting results for the quarter, we continue to see solid performance from our U.S. operations, supported by continued positive results from prior accident years. For the quarter, and including our runoff segment, we saw positive development of approximately 38 million, predominantly from accident years 2005 and prior. This was offset in the quarter by approximately 19 million of reserve additions, in response to some severity claims and large claims we saw coming mainly from the current underwriting year.

Most disappointing in the quarter was the underwriting result we experienced in our International Specialty segment, where we increased our position for Hurricane Ike by $12.1 million and took a provision for current and recent year property losses of approximately $11.4 million. The latter was the result of the significant non-catastrophe property losses experienced across the international marketplace in 2008.

For the year, our loss ratio was 64.3%, which includes 6.7 points of hurricane and storm losses of $75 million, net of reinstatement premiums.

In 2008, we continued to focus on efficiency. We saw improvement in the expense ratio, reporting 36.1 for the year versus 38.2 for the same period in the prior year. This continues to be a priority as we have begun the new year, and we believe there is continued room for improvement.

Now let me turn to our balance sheet and I'll begin with our investment portfolio. Both the equity and fixed income markets experienced unprecedented volatility in the second half of 2008, and during the fourth quarter, we recognized a net pretax realized loss of $16.8 million. The net realized loss included other-than-temporary impairment write-downs of $22 point million for the quarter on investment securities, largely related to our equity holdings, and financial and commodity related businesses.

These write-downs were partially offset by sales of various fixed income and equity securities. For the full year of 2008, we recorded net pretax realized investment losses and OTTI write-downs of approximately $35.1 million.

At December 31, our investment portfolio was approximately $4 billion with a net unrealized loss position of $7 million, in a similar position to where we ended the third quarter. While economic uncertainty continued to hurt pricing in almost all equities, certain sectors of the fixed income portfolio benefited from the risk aversion and flight to quality.

Treasuries, agencies, municipals, and higher-quality MBS all saw spread compression, with an aggregate gain of roughly $58 million over the market value of the portfolio at September 30, 2008.

Our conservative portfolio management philosophies were reflected in our results for this quarter and for the year. At the end of December 2008, the fixed income portfolio duration was three years, with an average credit quality of AA-plus and the tax equivalent yield of 4.5% for the fourth quarter and for the year.

As we move into the new year, with the significant amount of liquidity that's been injected into the financial system, we expect the yield environment to remain challenging as we continue to focus on and maintain credit quality.

Our investment in equity securities is approximately 7% of the entire portfolio, and generally is comprised of larger cap companies. At the end of 2008, the unrealized gain position on our equity portfolio was approximately $17 million on a pretax basis.

The second-largest line item on the asset side of our balance sheet are our reinsurance recoverables. While the balance at year-end of $1.5 billion was up significantly, we had limited increase here from the organic growth in our business segments. Instead, this increase is largely the result of the consolidation of the accounts of our trade capital partners in the International Specialty segment. The top ten reinsurers that make up this balance comprised approximately 49% of the entire balance and were all rated A-minus or higher by A.M. Best.

With the acquisition of Heritage, we've also taken on some exposure to non-dollar currencies, largely sterling. The dramatic move in sterling against the dollar impacted both the balance sheet and income statement in the quarter.

Referring back to the income statement for a moment, our tax rate in the quarter was impacted by the move. As on a tax basis, the loss we reported for the quarter in the International Specialty segment was converted to a gain; hence, we incurred a tax provision rather than a tax benefit against the operating loss.

Conversely, our book value was negatively impacted by the decline in the value of sterling assets we hold in that operation.

Despite this year's difficult operating environment, capital markets, and currency fluctuations, we managed conditions well, with book value impacted for the year by the net effect of earnings, a level result in the fixed-income portfolio, and declines related to our equity portfolio in non-dollar denominated assets. Again, we are very pleased with the result being only a decline in book value of 2%, reporting $44.18 at the end of the year.

Finally, I'd like to comment on the overall capital structure, before we open it up for questions. Argo Group ended the quarter with $1.8 billion in total capital, between $1.35 billion of book equity and $429 million of debt. That debt is broken down between $311 million of trust-preferred securities and $117 million of senior debt. Our capital ratios remain strong, and we feel we are properly positioned to meet our business plan for 2009.

Overall, the business model we've built and diversified over the last year is well positioned to perform financially. Operator, that concludes our prepared remarks and we're ready to take questions now.

(Operator Instructions). David Lewis, Raymond James & Associates.

Good morning. Congratulations on a solid quarter. Mark, given the dislocations in the market, can you discuss the current competitive environment? More specifically, can you talk about the pickup in RFPs in the industry and whether you actually are seeing any additional new business writings coming out of that?

Are you talking about some of the larger account business, or just in general?

Just in general. AIG, obviously a larger account player, but I would say they're across the board. I know a lot of players out there in the market have said that that business is getting shopped. I guess I'm curious whether, even though it's being shopped, is it actually finding new homes, or is AIG defending their market share by being aggressive on pricing?

I would say -- our experience is that there is more business being shopped and we see that in the form of higher submissions year over year. That's not necessarily leading to more bound policies for us. In fact -- we were just discussing this yesterday -- our hit ratio has actually gone down for some of our businesses, E&S in particular, so there's a flurry of activity, but the pricing isn't necessarily at a level that we think is appropriate, which is why you have seen a decline in the amount of gross written premium in our E&S segment for the second year running now.

It depends on each market, but, yes, there are some people who are still trying to defend their renewal businesses. And there are other companies who are aggressively trying to take that business away. And so, if somebody is undercutting your policy by -- your renewal by 20%, and you want to keep it, and the only way to differentiate yourself is on price, then the only way to keep it is to offer a discount more than the 20% that the guy who wanted to take it from was offering.

So we do see that happening in the marketplace on small accounts and large accounts. But mainly, I would say, we're just seeing a flurry of activity for medium- to larger-sized accounts. On the small account business, I would say not so much, and I think that has more to do with it's just so expensive for agents and brokers to shop that business cost effectively for themselves, or for the ultimate policyholder.

Secondly, can you talk a little bit about some of the lost underwriters from Heritage, since you closed that transaction, and whether you feel that you're having any impact as a result?

Yes. I think it's a hugely positive impact. The underwriters you're referring to left at the very beginning of July, and as I mentioned in my opening remarks today, we were able to bring in a very well-respected underwriter in the Lloyds market named Neil Chapman, who has now had a chance, for the last four months, to really -- to get his hands on that book and reshape the book. And we are already in a better position today, and he will -- he and his team will have finished reshaping that portfolio by the time wind season begins on July 1. So I am actually very positive and very pleased with the team that we now have underwriting that portfolio.

I'll come back with some additional questions. Thank you.

Mark Lane, William Blair & Company.

I have a few questions. First, on the expense ratio and operating expenses overall, what is your goal this year in terms of bringing the expense ratio down?

That's a function of what happens in the marketplace this year. Our first goal is to not have -- or I should say our first goal is to have non-acquisition expenses remain as flat as possible.

As I was mentioning in an answer to the last question that was put to me, we're seeing more submission activity in most of our businesses, and while we have automated more of our business processes and are able to do more with technology, in particular the Internet, the truth is, when processing goes up, people still have to touch it, and so, it's very difficult to cut expenses when processing is going up.

And so, we are trying very hard to keep expenses flat. Now the good news is, if the market does change, and it only has to change a bit, then we should see written premium begin to improve, in which case the expense ratio will stay flat and then slowly begin to improve, as we begin to write more premium. I am really thinking about the E&S business and the Commercial Specialty business when I say that.

And what about the growth opportunities or expectations for the reinsurance business, and also the International Specialty business. You brought in some new teams, the market is changing, you've got new underwriters in the Heritage -- in the Heritage business. What sort of expectations should we have for growth in those two segments?

So let's talk about International Specialty first, which is Heritage. While we're actually seeing price improvement in the property market, which makes up a significant portion of Heritage, I think that the majority of 2009 will be spent re-underwriting the property portfolio of 2008, and I think we will then have an opportunity to grow the portfolio later in the year.

But I think that, right now, we're more focused on making sure that we have a more balanced portfolio that we think is more in line with our group, and that takes the first half of the year and the very beginning of the third quarter.

We -- there are a number of underwriting teams that we have been speaking with, off and on, not only at Heritage, but within the United States as well. And I think we may have an opportunity to bring on another team or two during the year. But, like the U.S., those teams tend to write small niche business, and I would describe it in terms of GBP5 million to GBP15 million worth of business for each team during the year, not GBP50 million to GBP100 million, like some things that you see happening at our company and others.

So I think for 2009, we're focused on continuing to bring in teams that are additive to what we're already doing, but given the current market pricing, I think it makes sense for us to write some business but not a lot of business, and focus on making sure that we've got it right at Heritage. (multiple speakers)

What is the size of that business, pro forma, for 2008? Where did -- we only see the business since the acquisition, what was the gross written -- gross premium written for International Specialty for the year? What's the size --

For 2008? For the entire year? They wrote about -- I'm doing this a little bit from memory because I don't keep the full year in front of me, but they wrote about GBP315 million of premium. So, pick your exchange rate, but call it $1.50, 400 -- what would that be -- $475 million? Now that's -- that's Lloyds premium, right, so that's net of commission. If you want to think about it in terms of the same dollar amount of business that we write here, you'd gross it up for commissions.

Think about 700 million in dollars, and my guess -- I believe that, given what I just said, that we -- with the market conditions the way they are today, I believe that will remain flat. If the market does begin to improve, then there is an opportunity to grow premium by 10% or 20%.

Also in 2008, we kept 54% of the syndicate capacity. In 2009, we will takes 62% of the syndicate capacity, so our written -- our net written premium, if you will, will increase in 2009 versus 2008.

Okay. I'm sorry, then on the reinsurer. (multiple speakers)

So now, let me finish your first question and talk about reinsurance. While the reinsurance market is improving from a year ago, we're of the opinion -- or, I should say, Andrew Carrier, who is running that book, is of the opinion that we ought to write a bit more this year. But the pricing isn't really robust enough to want to write a lot more this year relative to the additional volatility that we bring on the books.

There are a few -- there's a little bit of re-underwriting that he'd like to do in the portfolio, so we don't expect -- we're not planning, from a premium basis, for the reinsurance book to grow that much in 2009 over 2008. So I would say growth is 5% to 10%.

And some of the new initiatives that we talked about on the casualty side for Argo Re, which is, even though they are insurance, they will go into this segment. That will lead to written premium in the second quarter and the remainder of the year, but, again, we're talking about -- $10 million to $20 million of premium that I would say on an annualized basis is $30 million to $40 million.

And some of that is very market-specific, or I should say market-condition-specific. While conditions have begun to improve, they have not begun to improve to a point where we want to write a significant amount of business.

Last question, regarding the underwriting -- you mentioned re-underwriting a couple times. First of all, in the reinsurance business, it's not an old business. What are you re-underwriting? It just started in the beginning -- at the end of 2007, and this -- the new underwriter was there at that time. And then, in Heritage, you also talk a lot about re-underwriting the property book, which is basically the main thrust of the business. What -- what is going on there?

You had a disappointing quarter from a loss perspective. You've got new underwriting in there. Are you not happy with the business that you got when you bought the company? Or is -- has something changed, or --

The answer is no, I'm not happy with the business that's on the books there. And so, yes, we are re-underwriting so that we are happy with it.

To be honest, I am very disappointed with some of the losses, particularly the -- what we refer to as attritional losses, so non-cat losses that have come out of the book during the year.

Now, we're not the only underwriter to have experienced some of this, but I think we have experienced more than our fair share, given the losses that have come into the London market this year.

We are well on our way to changing that, and as I mentioned earlier, we will be through by July 1.

Now, as respects the reinsurance book, whenever you write a new book of business and you're trying to get a balanced spread of risks, at the end of the year you look and figure out where you are and sometimes you need to realign it. So perhaps I should not have said re-underwriting the book of business, I should have said realign some of the aggregate risk that we have on a worldwide basis.

So, there's very little -- there's very little change that needs to be made to the reinsurance portfolio. There is a fair amount of change that's being made to the property book at Heritage.

Thank you.

(Operator Instructions). Bijan Moazami, Friedman, Billings, Ramsey Group Inc..

Good morning, everyone. A lot of the questions that I have has been already asked. In particular, I am interested to know whether or not you have to make any additional capital contribution to the Heritage operation. Because, obviously, sterling has decreasing value, you write a lot of the premium in U.S. dollar, and I'm wondering if you have to post additional letter of credit there.

First off, we have hard assets at Lloyds. We don't use letters of credit for our capacity there. We have had conversations with Lloyds. We have gone through a look at the change in the business plan and the change in the capital required.

We had some additional capital on deposit at Lloyds at year end, greater than what we had -- we've been required to have at the prior year. And so, we are not going to have to put any additional capital up at the moment.

As the year progresses and we see how the environment develops, we have sort of provisionally discussed with Lloyds the thought that we may increase the amount of the syndicate, again, depending on market conditions. That would require us to put up additional capital. But for now, everything we have on deposit will be sufficient to meet the requirements.

Thank you.

Doug Mewhirter, RBC Capital Markets.

I just had two questions. First, Jay, would you -- what, I guess, investments are you putting most of your new incoming cash flow into? Is it -- in terms of asset classes or on the risk range?

High credit quality. There's plenty of yield in high credit quality today to get the returns that we'd like. So we're not -- we're certainly not chasing credit quality.

We've had a decent amount of investment into municipals. We bought some of the government-supported financials, and we have very selectively but selectively bought some CMBS. And we're finding opportunities where some of that CMBS is effectively treasury defeased, and yet, still offering some good yield. But that's a very, very small allocation. So for the most part, new money is going into municipals and government-sponsored securities.

Thanks. I guess for Mark, refresh my memory. Is there any exposure to windstorm clause from what Heritage writes or what your Bermuda operation might write? And if so, do you have any indication of what impact that might have?

The answer is yes, we do have some exposure. We're trying to figure out what it is because we write mainly -- most of the accounts we think we may be exposed to, we've written on an excess basis and we're not sure if the loss is going to get up to us, particularly on the reinsurance program. So based upon what we know now, there will be some, but not very much, loss.

Okay, thanks (multiple speakers)

That wasn't very analytically specific, but it's just too early to tell.

That's fine. That's what -- most other companies have said the same thing. A very wide range of estimates. Thanks. That's all my questions.

(Operator Instructions). Amit Kumar, Fox-Pitt Kelton Cochran Caronia Waller.

Thanks and congrats on the quarter. Maybe just going back to the discussion on the markets. You do have, I guess, a $150 million buyback authorization, and just listening to the commentary, is it fair to say that there could be some action on this front as we head into 2009 or is buyback still on the back burner?

The answer is that's always an option, and we certainly are thinking about it a lot, particularly where our share price is. But until the capital markets and the credit markets settle down, I think we need to keep our powder dry and make sure that we are properly capitalized.

That's helpful. In terms of -- I know you don't give guidance, but we have talked about a mid-teens return goal. How confident are you that, in 2009, we might be able to hit that?

I think that's a real challenge for any of us. I think that -- the last time I looked, it was all over the board. But for most specialty P&C companies, I think the consensus ROE for that group of companies was somewhere in the 12% to 13% range.

I am hopeful that we will be back in the double-digit range for 2009, as compared to the single-digit range that we were in 2008, which has been quite frustrating. And a lot of it, of course, will depend upon what events happen during the year. If market pricing remains soft, which we're still in a soft market, and there are a number of significant storm losses again this year, I think that will be challenging, but it will be challenging for the whole industry, not just us.

So if we get some improvement in market pricing, I think that will help us as well. So for 2009, I think that focusing on a 10%-ish ROE is probably more realistic than a 15% ROE. And I think, given where we are in the market environment and what our competitors are looking like, I think that's a reasonable goal for us, given where we have been in the last couple of years.

That's helpful. I guess maybe two quick numbers questions for Jay. In terms of the foreign exchange impact, could you quantify that?

The foreign exchange impact hit in three places. Hits the balance sheet, hits the income statement through FX, an FX line item in the income statement, and then it affected our tax rate.

So on the income statement, the net FX gain was about $3.5 million. The tax rate, as I pointed out, was sort of -- the exact opposite of what you would expect. Again, that's a result of our London business being a UK taxpayer. You take the entire business, which is largely dollar-denominated, you render it to sterling, and you end up in a situation where you've got a dollar business in sterling having a lot of FX gains, hence the tax provision.

On the balance sheet, the movement in sterling affects our sterling-denominated assets, just as it would -- just as any movement in interest rates or otherwise would affect our assets and goes through the income statement -- I mean, sorry, goes through the balance sheet.

So the balance sheet for the year was down 2%. That's the net effect of earnings offset by -- the equity -- the decline in the value of the equity portfolio and the decline in the value of our sterling-denominated assets.

So you can kind of do the math from that. Net income is 62 million, and sterling move on the balance sheet down about 40, and the equity position down about 60. Those are approximate numbers.

That's helpful. I guess, just one other quick numbers question. Could you just refresh us as to what's the reserve number remaining on the PXRE book?

I believe the PXRE reserve is approximately 80 million.

Remember, we sold the U.S. subsidiary at the beginning of 2008.

So that represents just the property portion of the PXRE runoff.

In Bermuda.

In Bermuda.

That's helpful. And maybe just -- this is a final question, just going back to Mark's opening on the market conditions, and if I sort of compare and contrast it with others, it does appear -- and rightly so -- that you're taking a cautious tone. In terms of the competitors, obviously we've heard some extremely bullish commentary. What exactly is going on? Is it that account-specific that some companies are sort of reaping the benefits, or do you think that they are being too optimistic in their projections?

I think it's a combination of things. The market movements that we're seeing are submarket specific. I think we're all optimistic that, given what we know, that prices should go up. There is less capital in the markets -- there's less capital supporting the industry today, the P&C industry today, than a year ago, so that has to translate into less underwriting capacity.

And if capacity is going down, if loss costs are increasing, if investment income is going down, then it is just -- I hate to say it's just simple math, but it is. I think the challenge is that it's happened in a different way -- the different factors that are affecting our industry have kind of come at it differently this time, in that we have seen a challenge to both the asset and the liability side of the balance sheet, instead of just the liability side.

And margin is being impacted by both underwriting results and investment income results, and so, I'm not sure that we're, institutionally, getting things around and affecting the underwriting side, because with investment income going down, we can cut costs all we want, but the reality is if we want to get margin back up, the only way we're going to do it is to raise price.

So I think -- I think more people see that as an inevitable outcome, and are anticipating it affecting the marketplace sooner than others, and I guess I'm just being a little cautious.

That's good. Thanks so much and congrats once again.

David Lewis, Raymond James & Associates.

Just a couple quick questions. First, Mark, are you seeing any changes in limits by current policyholders, that they're trying to look for ways to cut back on expenses?

That's certainly one way. Everybody has -- everyone has a different book of business. For a lot of our accounts -- so, we might see that a little bit on the Commercial Specialty side, but most of our accounts in the U.S. tend to be $1 million dollar policy limits or less.

So we're more likely to just see that account go away and the insurer decide not to buy insurance, if they've got to choose between that and making payroll. So we'll see somewhat of -- we are seeing wider demand, but we're mainly just seeing policies going away.

That's helpful. Jay, given that your invested assets are -- or your new cash flows are going into munis, government agencies for the most part, I assume those yields in the market today are lower than your current overall yield on the portfolio, so it's probably fair to assume that we're going to see net investment income kind of flattened down on a sequential basis? Is that fair?

Yes. Well, we'll see some incremental growth in the size of the portfolio.

Right.

But, as I mentioned in my comments, the reinvestment -- the reinvestment -- the reinvesting environment is challenging because we're not going to take a lot of credit risk in this environment, and the underlying base rates, whatever they might be, the government yields, are very, very low.

So yes, I think it's fair to say that we're not reinvesting at the moment at the same yield as our overall portfolio.

And do you, by chance, know what the AOCI impact was on book value, or the book value excluding AOCI at the end of the year? Pretty minimal. I guess you indicated you're $7 million underwater, and I guess --

That's the net -- that's the net position on the portfolio. So some gains, some losses, net positioning, book to market down $7 million. So -- on $4 billion. So it's essentially flat, right? So are you talking about just the impact from the investment portfolio?

Yes, I'm just looking at the AOCI impact at year end. You may not have that.

I don't have that handy. I'll have to come back to you on that.

I know some people question how to tax effect the investment losses, etc., but our calculation we came up with -- kind of an operating EPS number of $0.80. Does that sound about right, given the tax effects in the different markets?

I think -- yes. If you're adding back the OTTI and assuming that most of that is in the U.S., there may be some -- there is some of that that's in the UK. That gets you into about the right ZIP code, I think.

Great, thanks very much.

(Operator Instructions). There are no further questions at this time. I would now like to turn the call back over to Mr. Mark Watson for closing remarks.

I'd like to thank everyone for taking the time today to join us on our call. I think we've made a lot of progress in moving our company ahead during 2008. I think we're very well positioned for 2009, particularly if the market changes. 2008 was very challenging, financially, but I think that we are doing the right things to be in a better position for 2009, as respects net income and ROE.

I'd like to thank all of our employees for working very hard during the course of 2008, because it was a very tough year, particularly at the end of the year. And I look forward to 2009. Thank you, again, for your time today.

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