Argo Group International Holdings Ltd (ARGO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2009 Argo International Conference Call. My name is Deanna, and I'll be your coordinator for today. (Operator instructions)

I would now like to turn the Conference over to the host for today's call, Mr. Michael Russell, Director of Investor Relations for Argo Group. Please proceed.

Thank you, and good morning. Welcome to Argo Group's Conference Call for the second quarter of 2009. With me today is Mark Watson, Chief Executive Officer; Jay Bullock, Chief Financial Officer; and Julian Enoizi, CEO of Argo International.

We are pleased to have the opportunity to review the Company's results for the quarter as well as provide management's perspective on the Business. No earnings guidance will be provided in the call.

Before we begin, I would like to mention we will be participating at three investor conferences in September and hope to have a chance to see you then. They are -- on September 9th, the Keefe, Bruyette & Woods Insurance Conference in New York; on September 15th, the Fox-Pitt Kelton Bermuda in Boston Conference; and finally, on September 22nd, the RBC Capital Markets Investor Conference, also in Boston. Should you attend any of these events, we hope you'll take advantage of the opportunity to sign up for one-on-one meetings with Argo Group management.

I would like to remind you this Conference Call is being recorded, and all participants are currently in listen-only mode. Following management's opening remarks, the operator will provide instructions on how you may queue in to ask questions.

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'd like to introduce Mark Watson, CEO of Argo Group. Mark?

Thank you, Mike, and hello, everyone. We appreciate that you've taken time to join us today.

I'm pleased to have Julian Enoizi on the call with us. Since joining us in early June, Julian and I have been working closely together to adjust the course of our Lloyd's operation and map out Argo International's potential. In a few minutes, I'm going to ask Julian to update you on his vision from our London operation.

Before we start, I'd also like to welcome Kevin Silva to our executive team as Senior Vice President of Human Resources. Given Kevin's successful track record of leading complex organizational changes, I have every confidence that he will help focus our global workforce on Argo Group's long-term strategy as an international specialty underwriter.

I'd like to lead off my remarks with some general comments regarding our second quarter results and progress. Then Jay will follow Julian to provide you with additional details on the second quarter financial results, and then we'll open the call to questions.

More than anything, the second quarter demonstrated the resilience of Argo Group's international business model. Our operating results were steady, and the conservative strategy used to manage our investments rewarded shareholders as the financial markets improved. Continued positive cash flow and the recovery in our investment portfolio, which at June 30th was valued at $4.1 billion, strengthened the asset side of our balance sheet.

For the second quarter, I'm pleased that we produced growth in book value per share, which has more than recovered from declines we experienced last year, which was about 2%. This year, we're up 7.5% for the first six months of the year.

And we continued to make additional strides that our current financial results don't necessarily reflect. During the second quarter, our employees continued to move forward on a number of internal initiatives that are further strengthening the Company's infrastructure and agility and will make us more efficient, cost-effective and customer-centric over the long run.

With the addition of our Bermuda and London operations, for the first time in a six-month period, we exceeded $1 billion in gross written premium. Even with our new businesses, I believe this is a remarkable achievement, and we remain sensitive to margin compression in the current market environment. While we should expect earned premiums and revenue to continue to grow in the second half, I'm not expecting gross written premiums to keep pace. Many of our markets, particularly in the US, remain quite competitive, and we will continue exercising diligence in low-margin environments.

Let me touch on a few areas that affected the quarter overall, and then I'll drill down a bit into each segment before handing it over to Julian.

Our operating earnings were $1.31 per share, a significant increase over the prior year's results. However, our net income per share was impacted by the following items. First, as a result of significant strengthening of the Sterling to the dollar, we incurred $12.9 million of foreign currency losses in the quarter. Because currency fluctuations can be an unknown and have an impact on financial results, we've chosen to break out our foreign currency changes in future quarters going forward. And we'll have Jay expand upon our strategy to manage currency risk in our business.

Second, we sustained additional realized losses related to our OTTI policy, as well as decisions made during the quarter to rebalance the portfolio among asset classes and currencies. For the most part, the losses recognized a result of items that had already been reflected in our balance sheet.

Third, as many of you know, we rebranded our London operation under the name of Argo International and shed the Heritage name. This move required us to take a $5.9 million impairment charge ascribed to the Heritage name.

And finally, we continued to see modest positive development from our US and Bermuda-based businesses, totaling $6.5 million for the quarter. This was offset by actions we took in our Lloyd's business. First we put up a significant provision to deal primarily with the 2008 underwriting year property account, and second revised our estimate per premium of a 2008 and prior-year property account; both of which were recorded in the second quarter.

Let me now spend a few minutes talking about each of our business segments, starting with the US. Our Excess & Surplus Lines segment continued to feel the effects of significant competition from other E&S carriers, particularly startups, as well as the admitted market, which for the last two years has persistently expanded its risk tolerance that, in our opinion, is at the expense of margin. These factors are revealed primarily in our hit ratios, which were down for the quarter.

And while the broader economy is showing signs of improvement, the adverse residual effects of the slowdown on our small business customers are apparent, a trend we believe will continue through the second half of this year.

There were, however, some positive signs for E&S. Submissions in quotes were up slightly in the quarter, as were renewal retentions. The rate environment seems to be bottoming in the professional, medical and environmental lines underwritten by Argo Pro. We also saw positive growth in Argonaut Specialty, our unit that underwrites slightly larger accounts than Colony.

In addition, we had few rate reductions on renewals. We're pleased some of Argonaut Specialty's premium growth is a direct result of new sales and product initiatives implemented by management earlier this year.

Finally, prior accident years continued to develop positively for E&S, which reported $5 million of favorable development in the second quarter.

Moving on to our Commercial Specialty segment -- the positive news here is that rate decreases have moderated in some businesses, and we're seeing flat to slightly increased pricing starting to emerge. And while this segment bore the brunt of the spring weather events, the $4.9 million storm losses reported in the second quarter were in line with our expectations for the quarter.

Commercial Specialty's top line was dampened in the second quarter for two reasons. First, we're in the process of re-underwriting certain classes of business within Argo Select -- that's our unit that includes both Grocers and Great Central -- and second, we continued to see significant competition within the public entity marketplace, which is putting pressure on renewal rates in our municipal business.

Let's move on to our non-US segments. And first, we'll talk about Argo Re.

In our Bermuda operation, the reinsurance segment delivered another solid quarter with no material losses in what typically is a period of heavy tornado activity. Furthermore, we should see only minimal impact from international events, namely the Central European floods and the China earthquake. I'm pleased that Argo Re's losses related to Hurricane Ike continued to develop favorably during the quarter and are indeed, we believe, redundant, which reaffirms our conservative risk-management discipline.

The catastrophe market's early momentum in the first quarter turned out to be more modest in the second quarter for property cat reinsurance. And while the reinsurance market is improving and we are experiencing incremental improvement, it is not turning sharply upward, as many had predicted at the beginning of this year and the end of last year.

The other part of Argo Re, our casualty and professional risk division, is tracking well with our modest plan we set for the year. And while we've been able to underwrite the classes of business we want, we're proceeding cautiously due to market conditions not yet being optimal.

And finally, our International Specialty segment's results for the quarter continued to reflect our re-underwriting of a portion of Argo International's property book. Since coming onboard some 60 days ago, Julian has been focused on extracting our Lloyd's syndicate's full potential, which we have yet to realize.

In view of our initial expectations, you all have heard me openly express my frustration with our results so far. And we've made some improvement in the second quarter. The actions that we took, including the significant revision and estimates for both premiums and losses, should position the London business well for future performance and growth.

Having said that, I'd now like to have Julian provide some color on the future of our International Specialty segment and Lloyd's operation. Julian?

Thank you, Mark. Good morning, everyone.

I'm delighted to have the opportunity to talk to you about Argo Managing Agency, Ltd., our Lloyd's platform, which will also provide a springboard in due course for our international strategy.

I've been with Argo Group for two months now, having joined from CNA, where I was President and Chief Executive Officer of the Corporation's European operations, which had offices in 12 countries and wrote business on a cross-border basis into most European Union territories. Prior to that, I was Deputy General Counsel for AIG based in Paris and, before that, European Counsel and Head of External Affairs for Chubb Europe.

Given that most of my career has been spent living and working in Continental Europe, I'm particularly excited by the group's acquisition in London, which I believe offers tremendous opportunity to construct a sustainable platform for international growth and constant and stable returns over time.

I am particularly pleased to have the opportunity to leverage the improved reputation that Lloyd's now enjoys as a result of the hard work of the franchise performance director over the past few years. This has resulted in a strong rating for Lloyd's, which itself has international expansion plans, the timing of which fits neatly with our own.

In tandem with this, being part of Argo Group, which has the essential elements for a successful insurance platform -- United States, Bermuda and Lloyd's -- is an added advantage, particularly since as we execute on our plans, we will have access to the pool of knowledge and expertise that reside within the group.

Today, Argo Managing Agency, Ltd. is a medium-sized Lloyd's syndicate, with just over GBP 400 million of gross written premium. The platform is best known in London as a direct and facultative writer in the property sector. However, it also has a strong reputation in the liability sector, particularly as a writer of UK professional indemnity.

My first order of priority since joining has been to begin the process of optimizing these two portfolios in order to generate the best possible return from the existing business, something I am confident we can quickly do. Having achieved that milestone, the value of the Lloyd's franchise to the group as a whole will increase and assume a central place in the strategy of the group, while allowing it to increase its geographical writings in both Europe and, eventually, throughout the world. This will provide Argo with both product and geographical diversification, allowing it to apply capital to whichever area offers the best potential for return at that particular time.

At the same time as optimizing our current portfolio, we will look at three other strategic initiatives. First, we will look to broaden the offering in our business by adding more traditional Lloyd's classes of business, making us a more composite syndicate, and, as a result, more diverse and more capital-efficient.

Secondly, we will look by virtue of our presence in London to offer specialist insurance products to the London commercial insurance market, something we will be able to do with relative ease and at low cost.

Third, and in the future, given my own background and experience, we will look to make the best use of our Lloyd's status in licensing to access Continental Europe in the first instance, and other territories in the world where profitable opportunities exist.

In pursuing these four strategic goals, I believe that we will have optimized our portfolio, broadened our platform and positioned ourselves for the best possible risk-adjusted return. In this way, over time, we will maximize the opportunity afforded to us by our platform, as well as achieving the best possible returns for our focused and specialist underwriting strategy.

In concluding my remarks, I would like to stress that consistent with our vision, we will undertake all of our strategic goals within the overarching discipline of applying the expertise of our bottom line-focused underwriters and their strict pricing and selection approach, so as to achieve acceptable returns wherever we choose to operate.

Thank you for your attention today, and I look forward to giving you further updates in the future as to our progress as regards the four strategic goals I have outlined to you today -- namely, optimizing our current portfolio, accessing the UK commercial and the Continental European market, and then finally, making use of the Lloyd's franchise to seek out other parts of the world that offer profitable opportunity.

Thank you. I will now hand you over to Jay.

Thanks, Julian.

Let me go back to the numbers and add some additional detail around the second quarter's financial results. And after that, we'll take your questions.

As mentioned in our last call in May, we were seeing improvement in the conditions of the capital markets. And this evidenced itself in the quarter with solid improvements in asset valuations which, coupled with our operating results, led to an increase in book value per share of just over 5% in the quarter and 7.5% for the first six months. Having said that, we remain cautious on the operating environment, which remains quite competitive.

Overall, our top line continued to grow, up 44% on a gross basis. But in line with last quarter, the growth was driven largely by the addition of our International Specialty business, which we acquired effective June 1 of 2008. In subsequent quarters, the growth numbers will be more comparable. Absent this issue of comparability, the numbers reflect modest growth in this segment and our Reinsurance segment, with declines in our US businesses.

Investment income was up year-over-year, reflecting the larger asset base resulting from our London business and the benefit of a recovery of a state tax dispute, offset by a decline in yields for the portfolio as a whole. We've taken the portfolio shorter in duration -- we've kept the portfolio shorter in duration, given the prevailing economic environment. And as you are aware, rates at the short end of the curve are off substantially. At the end of the quarter, the duration on the portfolio was 2.8 years.

Turning to the underwriting results -- our US businesses continued to perform in line with expectations, with modest to positive development in our E&S runoff and Reinsurance units. The action taken in our International Specialty unit for the quarter reflected work we have been doing to re-underwrite and fully provide for the London property book. Majority of the action relates to the property binder book, which by its nature is a slow-reporting business. As a result of the work done in the quarter, we reflected both an increase in estimated losses as well as an increase in estimated premium.

From an expense standpoint, we showed quarter-over-quarter improvement, as our expense ratio was positively impacted in the quarter by scale in our Reinsurance business and by a reduction in International Specialty related to certain Lloyd's fees which are expensed in the first quarter. Having said that, we continue to focus a great deal of effort on creating further efficiencies across our platform.

Non-operating items for the quarter related to charges taken for realized losses in our investment portfolio, unrealized foreign currency movement, [and the] impairment of an intangible asset. Let me touch on each of these.

For the quarter, we recognized $9.2 million in unrealized investment losses, which included other-than-temporary write-downs of $7.4 million primarily from our equity portfolio. The balance of the charge is related to sales in our fixed income portfolio as we took the opportunity to rebalance positions, taking some gains and losses; and by the maturing of bonds in our London business, which were mark-to-market at acquisition of that business in a much different currency exchange environment. None of this activity is reflective of declines in values or credit issues which occurred in the quarter, but rather valuation changes that had been taken through the balance sheet in prior periods, and thus has already been reflected in our book value.

The rebalancing of the portfolio included reducing our positions in certain corporate names, replacing certain agency mortgage-backed securities with securities backed by mortgages with higher coupons, and harvesting some modest gains in our municipal portfolio.

The foreign currency losses which come through the income statement largely reflect translational adjustments related to reserves and other liabilities on our balance sheet which are denominated in non-US dollar currencies. Offsetting this movement of $12.8 million through the income statement was an increase to the equity [of] account of approximately $17 million, reflecting increases to the value of our non-US dollar-denominated assets.

Our policy is to match our liabilities with like-denominated assets and to further allocate our underwriting capital, primarily in the London business, in proportion to the relative amounts of business in each currency. By doing so, our strategy is to maintain a natural hedge to our book value against movement in currencies.

Finally, we incurred an impairment charge on the intangible related to the trade name in our London operation. On acquisition, we made a conscious decision to retain the name, and thus were required to allocate a portion of the purchase price to the value of the Heritage name. We subsequently decided to rebrand the company Argo Managing Agency, under the Argo International Holding Company. This change also required the impairment of the intangible established for the name.

The last income statement item which requires some additional explanation is our current-period tax provision. The low tax provision in the quarter is primarily the result of two items.

First, at Argo International, the individual entities prepare their accounts and their tax returns based in Sterling. During the quarter, the individual entities had foreign exchange losses as a result of translating their various non-Sterling-based accounts into Sterling. As a result, taxes were low in this jurisdiction.

Second, the majority of the realized losses were incurred in the US, effectively reducing the tax impact in this jurisdiction. To provide a consistent presentation in comparability, we have used an effective tax rate against our operating earnings, which closely reflects our expected tax rate.

Now let me turn to our balance sheet, and I'll begin with our investment portfolio.

At June 30th, 2009, our investment portfolio was approximately $4.1 billion. Our equity holdings rebounded from a sustained rally throughout the quarter, and our fixed income holdings concurrently benefitted as the rally eased credit concerns. At the end of 2009, the fixed income portfolio had an average credit quality of AA plus.

The second-largest line item on the asset side of our balance sheet is our reinsurance receivables, which had a balance at quarter end of $1.2 billion, up slightly from the previous quarter. Our internal monitoring of reinsurance receivables is rigorous, and we feel our exposure is minimal, as the top 10 reinsurers comprised approximately 50% of the balance and were all rated A or higher by AM Best.

Finally, I'd like to comment on capital structure. Argo Group ended the quarter with $1.8 billion in total capital, split between $1.46 billion of book equity and $378 million of debt, comprised of $311 million of trust-preferred securities and $66 million of senior debt. We reduced our senior debt by $60 million from the end of the previous quarter by paying down our revolver balance, which remains undrawn at the end of July. We feel we are well positioned to support our business for the balance of the year and take advantage of other attractive opportunities that may present themselves.

Before I conclude my remarks, I wanted to mention a couple of new additions to the Argo Group in the quarter, evidence of our continued effort to expand the ranks of our talented management team. In early July, we announced the appointment of two key executives to my team.

Bernhard Scheifele joins Argo Group as our Chief Risk Officer. Prior to coming onboard, he worked at Munich Re for more than 16 years as Head of Division of Planning and Controlling for North America, responsible for capital management, strategic and annual planning analysis, and enterprise risk management.

Also joining my team is Mike Fusco, as Chief Actuary. Mike has recently been in consulting practice and brings with him 39 years of insurance industry experience, most recently at CNA, where he served as Chief Actuary.

I'm pleased to welcome these gentlemen to the Argo Group and my finance team.

Operator, that concludes our prepared remarks, and we're ready to take questions.

(Operator instructions) Bojam Moazami, FBR Capital Markets.

Good morning, everyone.

Jay, you went through your comments a little bit quickly. I know that you're decreasing the duration of your bond portfolio. But what are you getting and buying with the new money, and what kind of yield you're achieving there?

The yields still aren't great, but we moved out of certain mortgage-backed securities in the 4% to 5% coupon range to securities in the 5% to 6% coupon range. We're still with that -- having said that, yields are in the 4.5% to 5% -- 4.5% is probably more accurate.

We've found some good opportunities -- and this is in a very limited way -- to buy some very seasoned CMBS during the quarter. These would be deals that have -- these would be transactions that have treasury defeasance as part of the structure. And we also rotated out of some of the prefunded municipals into other municipal categories where we thought there was more value.

So there certainly are opportunities to find value on the investment side right now.

Are you not buying any corporate?

Yes, yes, we -- sorry, we also did invest in corporate names, adding some credit to the portfolio.

But we did that earlier in the year.

We did that earlier in the year. But we did take an opportunity in the quarter to reduce our exposure to financials. But we have added some credit.

Mark, Commercial Specialty -- the combined ratio is over 100. Could you explain what that is, why is the combined higher than 100? What are you guys doing to bring it back down?

Well, most of that was driven by adverse development in the quarter related to our public entity operation. I don't think we'll see that again for the remainder of the year. And that was -- Jay, can you help me out? What was the amount of the adverse development in public entity?

$3 million.

And also -- sorry, then there was another couple of million related to raising our accident-year loss pick for Argo Select. That's the piece that includes Grocers and Great Central. And I think we raised our loss ratio pick on an accident-year basis by a couple of points there.

That's relating to program business?

No.

Thank you.

(Operator instructions) Amit Kumar, Fox-Pitt Kelton.

Thanks, and congrats on the results.

Just going back to the discussion on premium production and the binder book -- could you just remind us, what's the portion of the binder book, of the overall Lloyd's book? And where do you see it ending as we go forward?

This is Julian. The proportion of the binder book in 2008 was approximately 20% of the overall portfolio. By the end of this year, it will be around about 10% or 11% of the overall portfolio, which gives you an idea of the direction that we're driving the binder book.

I can't yet tell you where I think that will finish up, but I think it will stabilize in the short term. But we are continuing our efforts to re-underwrite that portfolio, both in the London platform but also looking at leveraging the expertise we have in the US to ensure that we're managing our binders, certainly in North America, from a group level rather than just simply a Lloyd's level.

That's helpful, thanks.

And in terms of the seasonality of the premiums -- I think it's a -- is it a 60-40 split in the first half and second half?

Yes. Roughly, Amit, that's about right -- that you would expect to see about 60% of the business written on the top line in the first half of the year. I think you have to do a couple of -- you have to do one adjustment -- you need to back out the additional premium that was estimated in the quarter. And then, if you take the first quarter and the second quarter, and you assume that's 60% of the book, it's about the size that you would expect. It's slightly smaller than the numbers we talked about at acquisition, but that's really a reflection of the fact of the movement in Sterling versus the dollar.

Got it, thanks, Jay.

I guess one quick -- two quick numbers questions -- could you remind us what the remaining reserves on Ike are? I think you mentioned that they were developing favorably.

The total -- the favorable development that we've seen -- I'll come back to your question, but the favorable development that we've seen has primarily been in our Reinsurance business. And the initial provision in the Reinsurance business was, I want to say, $15 million.

In the US, I think our Ike provision -- I'm doing this off the top of my head -- I think it was around $20 million in the US. And then, in London, on a gross basis, 100% syndicate, it was $65 million. Our portion of that was approximately $42 million.

We haven't seen any movement in -- negative movement in either the US or the London piece. And we've seen some positive development coming out of the Reinsurance business.

That's very helpful.

And just finally, on the tax rate -- is it fair to say that one should assume a low 20s for Q3 and Q4?

Absent unusual events that externally affect the tax rate, that's exactly right.

Okay, very helpful. Thanks so much.

(Operator instructions) Scott Heleniak, RBC Capital Markets.

Hi, good morning. Had a couple questions on International Specialty. Julian, you mentioned the -- I guess Julian's probably the one to answer this -- you mentioned the initiatives and licensing new products, et cetera. I'm just wondering how quickly we can see the impact from some of the initiatives you mentioned. Is that sort of going to take a couple quarters? Is that something where there's an immediate impact, getting those out there?

Well, I think what I would first of all do is stress that we have, in gross written premium, GBP 400 million, $600 million-odd portfolio. And I think my first priority, as I said in my comments, was to optimize that portfolio.

Going forward, as a Lloyd's entity, there are clearly two things -- certainly one thing, from a Lloyd's perspective, that we're not doing. And that is writing anything outside of property and liability. So there are clearly opportunities within Lloyd's to open up product.

You asked me when I think that that would be prudent to do that? Honestly speaking, I think it's going to be middle of next year before we actually launch what I would call the third leg of the Lloyd's stool, to give us the new product in Lloyd's.

In terms of the London commercial market -- I think you might see that happen quicker. However, the London commercial market, by nature of the kind of premium you would write in there, is not a large amount of premium. So for that to have an impact in terms of the ratio of premium from London commercial to Lloyd's is going to take time. But I think you'll see us launch that towards the end of this year.

Okay. That's fair enough.

And then, the expense ratio, international, was down pretty significantly, too. Was there anything seasonal there? What kind of run rate are we targeting? In other words, is this sustainable, or is it sort of -- should we go on what we've seen in the past couple quarters?

I think I'll make a couple of comments on the expense ratio first of all, and then I'll let Jay expand on that. But I think first of all, this quarter's expense ratio is slightly unusual, both towards -- both as a result of the seasonalization of the way things happen in Lloyd's, and also because some of the higher commission-type business -- namely the personal accident business that we have in Lloyd's -- a lot of that is one-one. So you saw a lot of expense going in in terms of commission in the first quarter, and that was not repeated in the second. Over the year, that will smooth out.

The only other point I would say is if you were to ask -- I think there is work to be done in improving the expense ratio and the efficiency of the international operation. And over time, it's certainly my intention that you'll start to see that go down.

And I think earned premium might have been a bit higher this quarter than --

Right. So that has a distortive effect on it. So I think it'll return to more normal what you've seen over the six-month period. And even though a year ago, it was only one quarter, what you've seen over the six-month period is probably a more normal level.

Okay.

And then, my final question -- was wondering, Mark, if you could give a little more detail on the pricing environment. You talked about some more categories where you're getting price increases. Wondering if you can expand a little more on that, and just sort of the trend you've seen over the past three months. Are you seeing sequential improvements in pricing each month? Or is it kind of level?

No, I think we are seeing -- sorry, we are seeing sequential improvement. But it's not significant improvement, it's improvement on the margin. For our small account business, we're seeing -- and again, it depends on which exact product, but if there are rate decreases, they're very low single digits to rate increases of low single digits. We're -- and I think that's probably still true across the US. The exception to that is where you have new-market entrants that have decided they want to participate in the market where we are, we're seeing pretty significant price competition. And it could be 20 or 30 points. But that is an account-by-account issue, that's not a market issue.

Outside of the US -- in Bermuda, where we're focused on writing our property cat reinsurance book, we've seen five to 10 points of rate improvement on our book. And I'm not sure how reflective that necessarily is of the marketplace versus just our own book. They may be one in the same. But for our book, it's about five to 10 points up.

For our Excess Casualty business, which is all new to us -- and it's only a few million dollars' worth of premium -- our observations are rates are improving slightly from what we thought they would have been at the beginning of the year. But again, that's slight improvement, which is why I alluded in my earlier comments that we were keeping our [powder dry] a bit.

The London market -- Julian, chime in if you disagree -- the DNF market is continuing to see rate improvement. And also, I think that we've been able to select better risks, which is showing improvement on the loss side, which will start coming through the numbers at the end of this year and the beginning of next year.

But if I could just make a general comment -- a number of folks thought that by now the market would start to get really hard, and I don't see it.

Okay. That's helpful, thanks.

Mark Lane, William Blair & Company.

Good morning.

I just had a question regarding the -- just the growth in International Specialty, kind of constant-currency, constant-participation levels. So what was the size of the total gross book in Sterling this quarter versus the second quarter of '08?

Well, at acquisition, book pre-acquisition cost was about GBP 400 million. That was therefore, at acquisition, about an $800 million book of business. That same book today is roughly -- in equivalent size, it'll probably be -- Julian, it's about the same size as it was in '08?

It'll be flat (inaudible) --

Flat to '08.

And it'll --

And so, with Sterling at $1.65, it's more like a --

$640 million.

$640 million? Yes.

$640 million, something like that.

But quarter-over-quarter, is it flat as well?

I think quarter-over-quarter, it was up about 10%, Mark.

On a --

Year-over-year.

On a constant-currency basis?

On a Sterling basis.

Okay. And what does that reflect? The growth?

Well, part of the growth -- and again, on a constant-currency -- is the premium revision in the quarter.

Okay, right.

And --

And we did write slightly more property this year than a year ago.

Yes.

Okay.

Any particular area in the property market? I mean, cat exposed, geographically? Any insight there?

No, I would say it was pretty much across the board.

Pretty broad? Okay. Thank you.

It wasn't any one thing we were targeting.

Okay, great. Thanks.

Yes.

This concludes the question-and-answer portion of today's Conference. I'd like to turn the call back to Mark Watson for any closing remarks. Please proceed.

Thank you, operator.

Let me leave you with just a few thoughts.

Difficult markets notwithstanding, as I was just talking about, Argo Group delivered its shareholders good results in the first half of the year. All of our business segments are profitable. Our investment portfolio has returned to form. We've continued to generate strong cash flow, and book value per share is up 7.5% on the year.

Moving into the second half of 2009, we remain cautious yet optimistic. While competitors continue to maneuver to preserve market share or establish top-line growth, others, like Argo Group, are remaining patient while the market sorts things out. I would like to believe our diversified international platform gives us an advantage in that respect.

There are plenty of reasons to remain cautious. There continues to be intense competition in several of our business areas. Many of the markets in which we operate seem to have reached the bottom and have produced only modest rate increases. Even the property cat market, which established double-digit momentum early in 2009, lost some its tailwind in the second quarter. And as we approach hurricane season, property rates in coastal regions of the US remain fairly competitive, and that has resulted in a natural reduction of our property exposure.

Given these and other challenges, we believe Argo Group is positioned well in this part of the cycle. We've attracted very talented professionals to our top ranks to help with our continued growth in expansion, and our financial position has never been stronger. Given these advantages, coupled with our proven business model, we believe Argo Group has the unique ability to move ahead when the marketplace regains its footing and upward trajectory.

With that, we hope to see you soon at an upcoming conference. And thank you again for your time on our call today.

Thank you for your participation in today's Conference. This concludes the presentation, and you may now disconnect.