Argo Group International Holdings Ltd (ARGO) 2009 Q4 法說會逐字稿

Welcome to the fourth quarter 2009 Argo Group International Holdings Limited earnings conference call. My name is Chanelle and I'll be your coordinator 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). As a reminder, this conference is being recorded for replay purposes. I will turn the presentation over to Mr. Michael Russell, Director of Investor Relations.

Thank you and good morning everyone. Welcome to Argo Group's conference call for the fourth quarter and full year 2009. With me today is Mark Watson, Chief Executive Officer and Jay Bullock, Chief Financial Officer. We are pleased to have the opportunity to review the Company's results for the quarter and year as well as provide management's perspective on the business. No earnings guidance will be provided on the call.

Before we begin, I would like to mention we will be participating in the AIFA Insurance Conference on March 2nd and the Raymond James Institutional Investors Conference on March 9th. Should you be attending, we hope you'll take advantage of the opportunity to meet with management or sign up for one-on-one meetings. I would like to remind you 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 can queue in to ask questions.

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 such statements. Argo Group undertakes no obligation to publicly update forward-looking statements as a result of developments or events subsequent to this conference call. For a more detailed discussion of 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 to everyone. We appreciate you taking time to join us on the call today. In a moment, our Chief Financial Officer, Jay Bullock, will provide you with details of our forth quarter and year end financial results and then we will take your questions. First, let me make a few general remarks.

I'm pleased to report in 2009, Argo Group reported the best financial results in the Company's history and certainly the best in the decade since I have been running the Company as Chief Executive. In a market with intense competition and uncertain conditions, our Company produced record level results in gross, net and earned premiums, total revenue and operating income. Additionally, our book value per share ended the year at an all-time high, increasing by more than 18%. Although 2009 was another challenging year in the insurance marketplace, Argo Group made significant progress towards our strategic objective.

While a number of our peer companies have reported larger year-over-year increases in book value per share, I would like to point out that Argo Group's book value per share was down last year a modest 2%, while a majority of our competitors saw more deeper declines in 2008. Because Argo Group's business mix remains largely insurance rather than reinsurance, we are exposed to less volatility and we have a conservative investment portfolio keeping both sides of the balance sheet in good stead. We are particularly proud of our track record over the long term of increasing book value per share, which was up almost 13% over the last two years and more importantly on a compounded annual basis, we have grown book value over 12% for the last seven years. This level of performance puts us, we believe, in the top quartile of the property and casualty industry on a relative and absolute basis.

Underlying our increase in book value is the solid performance of our conservative investment portfolio and outstanding returns generated by Argo RE. Although our largest US operation, the Excess and Surplus Lines segment, bore the brunt of competition, it and all of our business segments for the year generated positive operating results. Business diversification, as well as the importance that each operating segment plays a crucial role in Argo Group's objective, that of becoming a leading international specialty underwriter.

The Company's operating ROE on a beginning equity basis improved to 9.7% for the year and actually in the fourth quarter had improved to 12% on an annualized basis. We implemented a number of changes in our Lloyd's operating platform during 2009, which I have talked about in previous calls. I'm happy to report that the operation generated underwriting profit in the fourth quarter and that with Argo RE meant for the first time we earned more income outside the United States than we did inside the United States. I think that outcome is reflective of our growth strategy that we have been executing over the last few years, which of course required us to deploy a sizable portion of our capital pursuing those opportunities. By doing so, we were able to diversify our product offerings and complete the build out of our platform, which in addition to the US includes reinsurance and excess casualty operations in Bermuda and worldwide property and non-US liability operations in London. I would also like to point out the capital that we have deployed from the PXRE acquisition two and a half years ago actually earned on an operating basis an 18% return on that invested capital after tax for 2009. Going forward, we expect our reinsurance and international specialty segments to significantly contribute to our operating results and complement our US segments, particularly as the pricing environment in the US continues to challenge premium volume and margins for our businesses.

With that backdrop, let me provide you with information on how each of our business segments fared in just a little bit more detail. First, let's start with Argo Group's best performing segment this year and that is our Reinsurance operations led by Andrew Carrier. For 2009, reinsurance produced a combined ratio of 52% and generated underwriting income of $42 million, the most among our four business segments. This in my opinion is a tremendous accomplishment given that Argo RE completed only its second year of operation. In the fourth quarter, our Reinsurance segment did see some softening market conditions, reflecting increased competition due to a lack of significant US CAT losses during the year. Yet, we believe Argo RE will continue to see rates per unit of exposure that are better than the primary market and can use capital more efficiently due to uncorrelated risks. In 2009, our Reinsurance unit's prior year loss reserves continued to develop favorably. Also in Bermuda, our Excess Casualty operation, Argo RE Casualty, had a modest profit in the fourth quarter. We are happy that we have gotten that off the ground. We remain cautious into the end of the year as competition remains fierce and the weak market conditions persisted. Although our Excess Casualty business has yet to realize its full potential, we believe it is positioned in the meantime to capture its share of profitable business in the professional lines marketplace in particular.

Let me talk now about International Specialty. During 2009 we made significant progress addressing some of the issues that we found challenging during the year, which you have heard me talk about. You may recall that we were reworking the property book earlier in the year, particularly our direct and facultative operation that made a strong contribution to earnings during the second half of this year, so I think that we have in place a book of business that we have been shaping for the last year that I'm very happy about. We are still making a few changes to our binder business that we think we will have through by the end of the second quarter of 2010. I actually believe that International Specialty is barely scratching the surface of its potential. It did produce underwriting income in 2009, but as we continue to leverage that platform I think it will make an even bigger contribution in 2010 and particularly 2011.

Let me talk about Commercial Specialty. In our US businesses the Commercial Specialty segment performed well in 2009 against the back drop of the stagnant economy, which adversely impacted policyholders' businesses and our ability to expand programs. On lower premium volume commercial specialty reported improved underwriting results in a combined ratio of 95.6%. Pricing in the segment remained adequate with flat to slightly upward pricing in selected regions and I should say that prior years of loss reserves developed favorably during 2009 by $3.7 million versus $8.2 million of positive prior year development in 2008.

Let's talk about E&S. As I mentioned last quarter, our Excess & Surplus Lines operation has experienced the most competitive environment and market rate challenges of any of our business segments. For the year, E&S produced modest underwriting income and for the first time in the segment in the fourth quarter reported a slight underwriting loss. Competitors continue to sacrifice rates and terms to sustain their top lines and admitted carriers are offering broader terms to minimize the declines in rate levels. That is taking business from us. Additionally according to the most recent data reported by the Insurance Information Institute, in 2009 both business bankruptcies and business start-ups were projected to be at their worst levels since 1993. A lot of the business we rely on in E&S is a function of new business starts, so that is hurting our new business growth for the year, which I think you have heard me talk about on previous calls. These economic factors alone have had a tremendous adverse affect on policy volume and our E&S book as a result of that. Let me also add that our prior year accident development, while still positive, was $15 million in 2009 versus almost $40 million a year ago in 2008. In our Runoff segment, there wasn't much activity this year on a net basis and we continued to see favorable development during 2009 of $1.6 million. We did settle the last large asbestos claim that we thought we had earlier this year and that was offset by some positive development elsewhere in the Runoff book.

Let me talk about capital and the markets for a minute. Having dealt with the tumultuous financial markets in 2008, when in affect the industry watched capital evaporate from its balance sheets, many believed 2009, including ourselves, would usher in more favorable market conditions. In fact, January 1st insurance renewals reinforced that positive sentiment back at the beginning of 2009, as did the property market albeit to a lesser extent.

What we could not see ahead was that the credit markets would return sooner than expected, effectively renewing a lot of the industry's available capital to pre-2008 positions. Couple that with one of the least active hurricane seasons in more than a decade and as 2009 wore on, excess underwriting capacity returned across the board. Marketplace conditions in the US and elsewhere remained highly competitive and rates continued to challenge the discipline to which we are committed.

Yet overall, Argo Group performed well in these uncertain conditions, in my opinion. Regardless of how the market fluctuated we had sufficient capital to execute our 2009 business plan and the stronger financial markets only strengthened our position giving us additional flexibility to adjust. Plus, the broader diversification of our product portfolio and expanded geographic reach allowed us to produce positive results in several areas of our business, while we adapted to less favorable conditions in other areas.

Let me also say that this morning in case you didn't see, our Board of Directors declared a quarterly cash dividend on our common stock of $0.12 per outstanding share for the quarter. I believe this action reflects first and foremost Argo Group's stable and strong balance sheet as well as our continued strong operating performance and favorable financial and liquidity positions. Paying a dividend also demonstrates recognition by our Board that repatriation of a portion of our capital directly to the shareholders is the right course of action when warranted by business conditions. We appreciate our shareholders patience in this regard over the last few years as we deployed available capital to invest in attractive market opportunities to help us build a robust international platform. We are confident the actions we have taken in our International Specialty business model will produce attractive returns for our shareholders over the cycle.

I would like to say a couple more things quickly. It occurred to me as we reported our year-end results for 2009 that this marks 10 years that I have been serving as the Company's CEO and a lot of things have happened during that time. I want to say it has been a privilege to lead the Company something I could not have done without the support and dedication of so many others, including employees past and present, our Board of Directors and of course our shareholders. Everyone should be proud of what they helped us build over the last decade, an industry leading specialty insurance franchise. Milestones of this significance cause me not only to measure what we have accomplished but reflect on how we got there. Given Argo Group's 60-year legacy, I'm pleased that the Company is today stronger and holds more potential than it ever has before. That potential is what we have worked so hard to build and intend to maximize going forward.

When I look at the past I break it into three chunks, which I will hit on real quickly. From 2000 to 2002, we spent all of our time trying to turn the Company around as we persevered through some pretty uncertain times. In 2000, we confronted a number of major issues, not the least of which was a shortage of capital and a California workers' comp market that was imploding. You may recall that only two out of 32 California companies survived that crisis at the end of the 1990's, Argonaut being one of them. For the first few years, we were in fix-it mode, spending a majority of our time cleaning up our balance sheet, shoring operations and running off unprofitable business. Early on we created a public entity business and in 2001 completed the purchase of both Colony and Rockwood from Front Royal, companies that became the cornerstones of our specialty platform. I think in hindsight, this proved to be a pretty timely and extremely accretive acquisition that created much needed momentum for the next phase of our growth.

From 2003 to 2006, in the middle part of that decade, we harvested the financial success of our E&S and Specialty Commercial operations during the hard market. We raised additional capital in the equity markets to support our organic growth and made selective asset acquisitions that expanded our geographic reach, product portfolio and industry talent in new and complimentary lines of business. In 2005, we created Argonaut Specialty and sold our Risk Management business and by 2006, our ROE was up to 15% and we were in a solid capital position.

From 2007 to 2009, or the last three years, we were able to expand our business internationally leveraging the momentum of our US operations and pursuing what some might characterize as an unconventional opportunity. What I mean by that, of course, in 2007 we acquired PXRE, by then a company that was almost in runoff, for $0.80 on the dollar. As I mentioned earlier, the earnings from that transaction this year generated a return of just over 18% on that money. We domiciled our headquarters in Bermuda and in January 2008 launched a highly successful reinsurance business supported by the capital we acquired from PXRE, from that transaction. Earlier this year, we acquired a team that started an excess casualty business in Bermuda. In 2008, we acquired Massamont, further extending the geographic reach of our Public Entity operation in the US and later in 2008 we acquired the Heritage Underwriting syndicate. I think that that transaction has allowed us to finish the build out of our international specialty platform and uniquely positions us among our competitors. Now with major operations in Bermuda, London and the US, I think that that diversity puts the Company in a strong position to capitalize on the strengthening market and capture additional business that that platform affords.

In the meantime, we have effectively managed capital and as we announced this morning we are in a position to share our balance sheet strength with our shareholders through a quarterly dividend. We appreciate the support of our shareholders by backing us and keeping our strategy in place for the last 10 years, which I think is now becoming a proven business model. I believe that collectively we have done the right things in the current market environment to generate growth, profitability and potential, all key factors in producing long-term shareholder value. With that, I will turn the call over to Jay.

Thanks, Mark. Let me go over and add some detail around the fourth quarter financial results, touch on a few items to provide some additional information and after that, we'll open it up to your questions.

While market conditions and investment returns remain challenging, this quarter's results reflect the value of diversification in our business platform. Strong performances from our reinsurance and international segments in the fourth quarter and year end produced pretax income of $39 million and $165 million respectively, up 10% for the quarter and 35% for the year. Although this quarter proved to be challenging for a few of our segments, we were still able to grow book value per share to a record high of $52.36, increasing another 2.6% for the quarter, and 18.5% for the year. These results reflect our focus on sound risk management practices and prudent approach to underwriting and investing.

Turning to the financials for our segments, the growth in our top line for the quarter is mainly attributable to the International Specialty segment. Argo International experienced a 58% increase in premium over the same period last year, which was in part from an increased participation in the syndicate. Our Reinsurance segment experienced growth in that written premium of $7.2 million over the same period last year resulting principally from our Excess Casualty business, as expected. Given market conditions, both of our US segments continued to show some contraction.

Turning to our underwriting results for the year, we saw strong performances in our reinsurance and international segments. While pleased with the improvement in our international segment, we expect next year's results to be effective by the actions taken to reshape the property book. Overall, the prior year development was favorable by $16.3 million, as we experienced favorable development for each of the five segments. For E&S, development totaled $5.7 million and was mostly attributable to Colony. For Commercial Specialty, development was $5.9 million and was driven almost entirely from Rockwood. Reinsurance experienced favorable development of $2.5 million with about $0.5 million of that coming from a decrease in NOI guesstimate, further evidence of our conservative underwriting practices in our Reinsurance segment. For Argo International, the development is best expressed net of premium and loss, which totaled $2.2 million favorable on a US GAAP basis. Finally for the Run-off segment, we recognized favorable development of $1.4 million in the quarter as a result of the executed legacy take down.

This quarter and throughout 2009 we adjusted 2009 and prior accident year losses prudently taking into consideration seasonal prior accident year on reserves in a competitive current year underwriting climate. As a result, like many of our competitors, our recent history has included favorable development on prior accident years. While we recognize that this may not continue indefinitely, our process leads us to continually evaluate the adequacy of our current accident loss ratios to ensure we are appropriately responding to changes in our business, the external environment and market conditions. Our Colony and E&S business provides a good example of this focus and discipline. During 2009 this business did have the benefit of favorable prior year accident development. At the same time, we adjusted our 2009 accident year loss ratio to reflect specific loss experience and the impact of market conditions on the business that we underwrite. Our expense ratio remained flat year-over-year as we continued the assimilation progress for Argo International and added a new excess casualty business within our Reinsurance segment. Efficiency, especially in regard to operating expenses, remains a priority for Argo Group.

Let me spend a little bit of time on the investment income, which was stable quarter-over-quarter reporting $32 million in both Q3 2009 and Q4 2009. We are pleased by the quarterly stability given that current reinvestment rates remain lower than our weighted average portfolio yield, due in part to the bond market rally in 2009. Additionally we have chosen to keep the duration of this portfolio fairly short with an overall duration of three years, as of year end 2009. This duration is closely aligned with our liability duration. Along with very low interest rates, valuations in most sectors appear full, given the rally post crisis and the global recovery remains lackluster and spotty. Therefore, we have positioned our investments conservatively. An example is our small allocation to equity at 6%. Our portfolio's weighted average credit quality is double A plus. This conservative position allows us the flexibility to deploy our investment capital as valuations become more attractive relative to risk.

In the fourth quarter we posted approximately $3.6 million in net realized gains. We took approximately $4 million of write downs in our fixed income and equity portfolios, in accordance with OTTI policy, which was more off set in realized gains in both of our fixed income and equity portfolios. During the fourth quarter, we reduced our equity portfolio by roughly 10% given strong valuations in this sector. We also experienced some realized losses related to FX, as we reposition certain assets in our international specialty segment for higher yields. This loss had previously been included in our comprehensive income in our balance sheet, so is neutral to book value. At 12/31/2009, our investment portfolio was approximately $4.3 billion in market value an increase of roughly $340 million since year end, much of this growth was a result of net unrealized gains across the fixed income and equity portfolios. The value of our equity holdings improved throughout 2009 and although fixed income sectors experienced slight during the fourth quarter due to the back up in treasuries, the value of fixed income assets had rebounded nicely since the beginning of the year as the sustained as the sustained risk route reversed much of the spread widening from 2008. We are confident that our conservative investment strategy will help us weather an expected rise in interest rates and continued volatility in valuations from the inconsistent global economic recovery. As valuations become more attractive, we are in a solid position to redeploy our capital as opportunities arise.

Finally a comment on our capital structure, Argo Group ended the quarter with approximately $2 billion in total capital. Split between $1.6 billion in book equity and $380 million of debt, comprised mostly $311 million of trust preferred securities and $69 million of senior debt. Our revolver remains undrawn as of year end 2009 and available for any supplemental liquidity needs. We feel we are well positioned to support our business and take advantage of other attractive opportunities that may present themselves in 2010. That concludes our prepared remarks and we are ready to take questions.

(Operator Instructions). Your first question comes from the line of Amit Kumar from Macquarie.

Macquarie. Just quickly going back to the dividend announcement, obviously that is great news. Can you talk us through the thought process compared to a buy back? What made you pick one over another? Would it be fair to say based on where the stock is trading at, you could perhaps could re-visit the buy back going forward?

We didn't necessarily choose one over the other, meaning a share buy back versus a dividend. The Company's had a history of paying dividends for many years and from 2003 until 2009 we were using capital as fast as we were generating it as we reinvested the capital back into the business. We thought it made sense to reinvest the capital now that I think we have our platform in place and we are generating some cash, we are now at a stage where we can go back to putting a dividend plan in place and also historically we have bought back -- we have done share buy backs as well as paid dividends back in the late 1990s. When I first became Chief Executive, we were buying back hundreds of millions of dollars of stock as we really weren't doing much underwriting then. This is not one option over the other. We have declared the dividend. A share repurchase is still an option when we think it makes sense and I think we bought some stock back a year ago. We still have our share repurchase authorization in place. This is -- this wasn't one over the other.

That's quite fair. If understand this correctly, you are understanding that you are keeping your options open but at the same time nothing is imminent or near term, is that fair?

We are keeping our options open.

So nothing is imminent on the buy back?

That's all I'm going to say right now.

That's quite helpful. Maybe just moving on, can you sort of chat a bit more about the underlying loss trends being higher in the E&S line? I think they jumped to 80.6% compared to 63.9% accident to loss ratio. Maybe explain that jump a little bit.

This is Jay. The accident year loss ratio that you see is a reflection of specific action in certain lines of business. In some cases it involves what I would call sort of surgical tactical exit of not a line of business but certain producers in a line of business and certain geographic areas in a line of business. That's one part of it. I think the second part of it is as we came into 2009, there was an expectation I think by many in the that is correct that we would see rates flat to perhaps up, in the second half of the year some of what you saw was us reacting to the continued rate declines in the market.

Meaning we re-set our loss picks for the year.

Exactly and the point there that we have made several times is we do not want to get -- we don't want to find ourselves short on the current or recent underwriting years.

If you look at our fourth quarter results for the last three years or maybe the last four, I think you will notice that our loss picks for the fourth quarter tend to be higher than the other three quarters during the year as we make sure we don't get caught short going forward with any adverse development.

I think that's fair. Just moving on, maybe just staying on that topic, on the international specialty side, I know that you have talked about not being happy with portions of the book and that was underwritten, are you at the point where you feel all the changes have been made or could there be more fixing of the book going forward?

I referred to that in my remarks earlier, I think on the largest part of the property book, our direct and facultative business, I think we are pretty well set with that business now. I think that's why we saw what we did see a benefit on the underwriting side in the second half of the year as a result of finishing that re-underwriting exercise. We have also made some changes to our binder book -- our property binder book and there are a few more accounts that we want to move around there which will be done by the end of the second quarter. That's a smaller piece than the D&F book was a year ago. We are doing a little bit more tweaking but we are spending more time looking prospectively than retrospectively.

Maybe one final question and then I will re-queue, in terms of your domicile, there has been a lot of movement with a lot of companies moving to Ireland or Switzerland and other places, what is your thought process on this issue?

Well, I think what matters most is where is the insurance marketplace and where can we be in the middle of that? We are happy with how we are organized today but just as we thought it made sense for us to be here in Bermuda a few years ago, because the market has moved here, we are certainly watching what everybody else is doing. We are very happy with how we are organized at the moment. I guess that's all I will say.

Have you examined other domiciles? Or you're not at that point at all?

As you have watched us run this Company over the last 10 years, we have our options open to more than one thing at a time but we are very thoughtful about what we do before we do it.

Okay. Thanks much.

(Operator Instructions). Your next question comes from the line of Doug Mcwhirter with RBC Capital Markets.

Good morning. I just had one question. In the E&S market, do you see any kind of light at the end of the tunnel at all, you and your peers really had some pretty punishing premium declines, some of it is exposure units just because of the economy, some of its pricing as well. What is it going to take to turn around the market and are you seeing any signs or preliminary signs of it recovering?

Well, you are right. Exposure units are down as I have mentioned in my remarks, a little or a lot of our business is the insuring of new business formations and there aren't as many this year. There weren't as many in 2009. 2010 doesn't look any better at the moment. We haven't had significant price declines. They have been small marginal price declines in our business because it tends to be the smaller accounts. The bigger challenges we have affecting the top line are continued broadening of risk appetite from the admitted market and a number of new start ups either private equity backed businesses or private equity backed start ups or subsidiaries of mainly of non US businesses, whether it be here in Bermuda or in the UK that -- the only differentiating tool they have is price. Most of them are smaller, have less capital than we do. When I say "we," the industry leaders, not just ourselves and their ratings aren't as good ourselves or other industry leaders. They are only differentiating tool they have got is price. That is not helping.

Business mix is something that we have been looking at and Jay alluded to that a minute ago and I maybe alluded to it is bit earlier in my remarks. We have been paring back our portfolio where we are not getting the margin on the underwriting side and only staying in the products and in parts of the US where we think we can generate a margin and right now we would rather sacrifice the top line to keep margin up. If you try and keep the top line up in this market, I think you will lose money. Even if you don't, you will chew up so much capital supporting low-margin business, it is just not worth it. When you -- when I look at the marketplace today, it looks a lot like it did 10 years ago and 10 years ago, you had a number of new entrants come into the marketplace and they were all posting 10% to 20% growth rates year-over-year and within a couple of years, that 2002, all of them had gone bust. I don't mean to suggest that I think all the new entrants will have the same fate. I don't think the E&S marketplace has finished playing out. Until the admitted market reduces their risk appetite, I think that we are in a shrinking market given what is going on with the US economy.

Thanks for your answer. That was very helpful. That's all my questions.

Your next question comes from the line of Bob Farnam with KBW.

Two questions for me. One is the expense ratio in some of the segments still seems high, like in the reinsurance segments, you are pushing close to 40%, I'm curious you had a lot of initiatives in place to lower the expense ratio over time, how are those coming on?

Well, let's just down the list and start with E&S, given the rate of decline and revenue as good as we have been in cutting expense, it is tough to keep that rate of decline up with the rate of decline in revenue and the reality is that as we continue to focus on underwriting margins, excuse me, on - - trying to keep the loss ratio pick down, the expense ratio is going to go up if the top line keeps coming down. At some point we will run out of cuts to make, although we do think we will see some expense improvement in E&S this year.

Part of the change in the expense ratio for Commercial Specialty was a slight decline in revenue but mainly it was a function of fee income coming through the business and a reduction of that fee income, which is an off set on the expense ratio. I would expect we would actually generate more fee in income in 2010 than we did in 2009 modestly, but I think that will probably serve to mitigate any change in the expense ratio as opposed to improving it.

For the Reinsurance segment, some of that was a function of the start up in the expense of getting the casualty operation going and I think you will begin to see the expense ratio come down in reinsurance as soon as the first quarter of 2010. For International Specialty, that's more a function of business mix. As we reduce the binding authority business, I believe we will see the expense ratio come back more in line because that has a higher acquisition cost on the commission side. We also I think believe we will write less business in 2010 than 2009 if the marketplace stays as competitive as it is and again it will be a challenge to reduce expenses as fast as we bring down revenue if pricing remains as competitive as we are seeing right now.

Okay. That's good explanation there. The other question I had was another line item. There was a decline in the interest expense in other line item relative to the prior three quarters of the year. Anything going on there?

Bob, that's a classification issue. We are now showing the fee income net. If you look at the interest expense number just shy of $6 million. We have just shy of $4 million of debt at 6%, 6.5%. That's $24 million, that kind of sounds about right. You will see the fee income as a net item going forward. It is a bit of a presentation item there. When you understand the numbers, it makes sense.

Thanks.

Your next question from the line of Howard Flinker of Flinker & Co.

Hello, Mark.

Good morning.

Good morning. Does your foreign exchange gain did it come in the fourth quarter from the translation of foreign premiums to the dollar when the Euro was still rising in the quarter. Do I understand that correctly?

Most of what you see coming from the income statement is all what I would call from the operations and balance sheet, not assets. So the answer would be yes.

Second, in your description of favorable premium development, is that retrospective rating on the insurance business?

No, it actually comes out of International Specialty. It is something that we believe we have corrected through some improved systems but it's largely related to the binder business in London, late reporting in that business and if you think about the way that that operates, you make an appointment. That appointment is open for 12 months. You can't have business that is written not on a 24 month policy but within a 24 month period. It is further exacerbated by the fact that the reporting system wasn't adequate for us to keep up with the actual amount of premiums. It literally is additional premiums that should have been booked out of prior periods that were reported late to us.

I see. Ultimately was the other -- do you still write workers comp in California?

No, we don't. We sold the Risk Management business in 2005.

Is the other survivor Zenith National?

That's correct. A new subsidiary of Fairfax.

That's what I was going to say. It is no longer an independent survivor. One day ago. Nice job in a tough market. Thanks.

Thank you.

You're welcome.

Your next question comes from the line of Ron Bobman of Capital Returns.

Good morning and congrats.

Thank you.

I had a question about reinsurance purchases for your insurance books as you have talked and a lot of people have talked underwriting margins are shrinking generally in books by virtue of rate movement. A lot of these other companies are choosing to buy less reinsurance and keep more on their books despite those shrinking margins. What are your plans? No change? Buying more? Buying less reinsurance for your insurance books? Thanks a lot.

That's a pretty fluid proposition. We put -- we sit down and look at the reinsurance programs for each of our businesses every year when programs for each of our businesses every year when they come up for renewal. In some cases we are actually buying more reinsurance today than we were a year ago. Reinsurance pricing is starting to make more sense relative to keeping business net and so what we are not doing, Ron, taking more business net so we can keep up the earned premium line. We buy reinsurance where we think it makes sense to reduce volatility and/or active additional capital and particularly when we can get paid for that in terms of seating positions. Where we think reinsurance is too expensive relative to what we believe the true exposure to be then we take it net.

Would you talk a little bit about any actions you have taken recently as far as reinsurance renewals and directionally where you moved it, a greater buy or lesser buy? Can you talk about the books where you did that on?

We have so many contracts going on, it would take a while. For a lot of the business that came up on January 1, we bought more coverage, not less. There might have been one small contract where we decided to take the risk net, but in every other case we expanded our reinsurance and retrocessional programs.

The comment you made on the question before me, maybe two questions before me, where you talked about the expense ratio, I think you said was going to come down or be evident that it would come down as early as the first quarter of this year. Is the reinsurance buy contributing to that by the seating commission driving down the expense ratio or no relationship?

The answer is a little bit. I was referring only to the reinsurance segment. Our reinsurance and retrocessional programs for the Reinsurance segment will create a benefit to our expense ratio but the primary benefit to the expense ratio is that the casualty business will start generating enough revenue to off set the expenses that we have been incurring since the beginning of last year. Remember, even though we wrote business last year, there is about a six month lag between written and earned. The revenue is now catching up with the expense load we have had for the last year.

Thanks. Best of luck.

Thank you.

I would like to turn the call back to Mr. Watson for closing remarks.

I would like to thank everyone for joining us today. I know everyone is very busy towards the tail-end of earnings season. I noticed that a number of our employees are on the call today, so I would like to end the call by thanking everyone who has been a part of the last 10 years. I think we are building a terrific Company and when I sit in my seat today and think about the opportunities going forward, I see many more today than I did when I first sat down 10 years ago and I'm looking forward to and I'm looking forward to seeing a lot of you next week. Thank you very much and we will look forward to talking to you all in three months at the end of the first quarter.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day and enjoy your weekend.