Argo Group International Holdings Ltd (ARGO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Argo Group earnings conference call. My name is Francine, and I am your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn this presentation over to your host for today's call, Mr. Michael Russell. Sir, you my proceed.

Thank you, Francine, and good morning.

Welcome to Argo Group's conference call for the fourth quarter and full year 2010. On the call today is Mark Watson, Chief Executive Officer, and Jay Bullock, Chief Financial Officer. We're pleased to review the Company's results for the quarter as well as the year, and provide management's perspective on the business.

Before I begin, I'd like to mention, we will be participating, March 8, in the Raymond James 31st Annual Institutional Investors Conference in Orlando. Should you be attending, please take the opportunity to sign-up for one-on-one meetings with management. I would like to remind you that the conference call is being recorded. 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. Mark?

Thank you, Mike, and hello, everyone. We appreciate you taking the time to join us today. In a few moments, our CFO, Jay Bullock, will provide with you additional financial details, and then we'll take your questions.

Let me begin by acknowledging that 2010 was not a stellar performance from a financial perspective, certainly not compared to our 2009 results when we reported a record-level of operating income and began to see a meaningful contribution from our non-U.S. businesses. In fact, more than half of our income in the second half of the year came from outside the US.

The same cannot be said, however, for 2010, which saw an unusually large number of catastrophic events occur around the globe. Major earthquakes in Haiti, Chile, and New Zealand, the Deepwater Horizon oil spill, and finally, major floods and a typhoon in Australia to end the year and begin the new one. While 2009 was and is a validation of our strategy to diversify our book of business globally, the impact of the 2010 series of events was felt quarter after quarter. At the same time, we took the painful but necessary steps to reshape our portfolio, especially in our syndicate, to be much more aligned with the underwriting philosophy of Argo Group.

Notwithstanding the financial results, I believe that we made significant progress in many areas, and ended 2010 in a much better place than we began. The actions we've taken over the past two years have enhanced the overall value and stability of our franchise, in my opinion, and I just want to point out a couple of them.

We made a number of structural changes which have enhanced our ability to repatriate capital, as evidenced by our dividend and share repurchase program during the year. Changes to our US platform, which included new management in our Excess and Surplus Lines segment, now led by Lou Levinson; development of a platform-wide property strategy; and the establishment and launch of Alteris, our alternative risk solutions company. The reshaping of the portfolio I mentioned, which included changes both -- which included changes in both our London and US property portfolios, the exit of certain amended lines in the US, and the combination of businesses in our E&S segment, where we combined both Argonaut Specialty and Colony together as one business unit. The appointment of Argo Group chief underwriting officer, Andrew Carrier, that will serve to reinforce the discipline and consistency of our underwriting philosophy across the platform. And finally, dedicated efforts aimed at improving our operating efficiency to put the group in the best position to expand by product and geography, when conditions permit.

And while you can no more count losses avoided than opportunities missed, I'm certain the efforts of the last two years have reduced, in an intelligent way, the potential volatility of our business model and helped to reduce exposure to losses in 2010. Or to say it differently, with the derisking of the portfolio, the losses that we incurred are significantly less than they might have been a couple of years ago. We've now seen the stability of our platform tested in two very different stressed environments. In 2008, which saw the combined effects of the financial crisis and two significant gulf hurricanes, and then the usual series of remote events in 2010. At the end of 2008, we saw our book value decline by just 2%, which I believe was at the top of our peer group, and during 2010, our book value increased year-over-year -- I should say our book value per share increased year-over-year by 12%.

So, I'd suggest that while 2010 may have been a modest year for financial gains, it was a good year in Argonaut Group's development as a specialty insurance underwriter. We have tremendously talented people throughout our organization today, a robust pipeline of new initiatives in the works, and a sound business model, so actually, I'm quite optimistic about our prospects for the year ahead. I'd like to briefly mention some financial highlights at the group and segment levels, and then Jay will elaborate on those in a few minutes.

So, let's start with a few group numbers. In 2010, Argo Group reported earnings per diluted share of $2.76, and operating earnings per share of $2.00 after tax. At December 31, 2010, book value per share was at an all-time high, up 12.5% from the end of 2009, inclusive of common dividends paid. On a positive note, our reserve position continued to develop favorably, with net positive releases totaling over $35 million in 2010, an increase from just over $30 million in 2009. This, as you know, was more than offset by total catastrophic losses of almost $80 million for the year, more than four times the level experienced in 2009; this is at a group-wide level. Catastrophic losses contributed to over six points on the 2010 combined ratio. These losses were the result of what we think are unusual global events, in the sense that we haven't seen this many before in any one year, and also an above-average level of storm losses in the US in the spring, affecting both the first and second quarters.

Let me talk about the two business segments in the US first. Overall in 2010, our US segments delivered fairly steady results, particularly given the headwinds each was facing, including, and you've heard me say this before, intense competition from both admitted and non-admitted established markets, new entrants vying for market share on price and/or terms and conditions, and the impact of the continued sluggish economic recovery on small businesses, which is the predominance of our US insureds.

Let me talk about our Excess and Surplus Lines business first. Our E&S segment generated profitable underwriting results and a combined ratio of 97.8%, improving on last year's results by almost 2 percentage points. Prior year loss developments in this segment continued to be favorable in 2010. Gross written premiums were down substantially year-over-year, which represents anticipated reductions, given the planned changes in the portfolio, and what I would describe as fierce competition coming from both E&S and standard lines carriers. We saw a modest favorable rate trend in the fourth quarter for the year in E&S, but I believe that that largely reflects our own initiatives during the year rather than any change in the market environment.

During the year, we combined the operations of Colony and Argonaut Specialty into a single entity called Colony Specialty and announced new leadership. We believe our refreshed go-to-market strategy will make us more responsive to our wholesale customer base, and make it easier for them to access our growing portfolio of products. The reaction we've received from customers to these changes has been overwhelmingly positive. It also flattens and simplifies our internal operating structure, which makes it more efficient for us to make decisions and also reduces costs.

Lou Levinson, who was appointed as E&S President about a year ago, has brought focus to opportunities in the US market and strengthened his leadership team to carry them out. Michael Fleischer was hired as E&S Chief Underwriting Officer, and Ron Vindivich was named head of the E&S Casualty and Transportation recently. We believe this team and the changes made had a positive impact on performance in the last half of 2010, and we feel very good about the segment's new direction under Lou and his team's leadership.

Let me now talk about Commercial Specialty. That segment generated modestly positive underwriting results, with the 99% combined ratio in 2010, reflecting the impact of US storms and elevated competition from both national and regional carriers. Gross written premiums were off substantially from 2009 levels, which was an expected reduction, given the market environment; our heightened vigilance in the underwriting process; and our exit from underperforming classes and business. Prior year loss development continued to be favorable in 2010. Commercial Specialty is pushing forward on initiatives that will be opportunistic in an improving economy. We're pursuing business in attractive markets where no clear leadership exists, and building upon the Argo Group brand. Commercial Specialty is also focused on developing products that meet our customer's needs, while adding small programs that are scalable when the opportunity presents itself. Additionally, as I mentioned earlier, we continued to develop Alteris as a multi-faceted platform for retail agents and the brokerage community, offering customers alternative risk solutions. With market-engaging activities like these underway, we see upside potential over the long term for our admitted business.

Let me now turn our attention to our non-US businesses and first talk about the Reinsurance segment. And, as was the case in 2009, our Reinsurance segment was our most profitable underwriting segment, in terms of underwriting profit; although, results were off substantially from the prior year. The Reinsurance segment produced a respectable combined ratio of 72.8%, which included 30 percentage points attributable to major loss events in 2010. Prior loss reserves for Reinsurance continued to develop favorably in 2010. It was an unusual season in the US, in that no major storms made landfall. Although, reinsurance pricing in the US remains adequate, we saw an expected modest reduction in pricing at January 1 renewals. Part of that, I think, is driven by client balance sheets in the US continuing to strengthen, which puts additional pressure on demand, meaning there isn't as much, and the continued existence of excess capacity continues to have a competitive effect among our competitors. Our Reinsurance operations in 2011 will remain disciplined and defensive, meaning that I don't expect to us grow too much, given the current environments in 2011.

The other part of our Reinsurance segment is the Casualty and Professional Risks. And the year-over-year increase in the Reinsurance segment premium is primarily comprised of the long tail businesses written by our Casualty and Professional Risks division, which now accounts for approximately $50 million of the segment's total gross written premium. We continue to build this book with caution, particularly our Professional Lines portfolio, where competition is fierce and rates trended downward slightly in 2010.

And then our last segment, which I have talked about a little bit already, is the International Specialty segment. And, as I've said, we continue to address many of the issues there, and I do believe we've made a lot of progress with our business, particularly the syndicate at Lloyd's. Having said that, we still have a lot of work to do, but I think that we now have a portfolio that's more aligned with Argo Group's underwriting philosophy.

Just a couple of numbers. In 2010, the International Specialty segment sustained losses in each of the three earthquakes and the Queensland floods, adding 8.5 percentage points on a combined ratio of 115.3%. During the year, market competition remained fierce, and the cost of regulatory compliance for the market remains a burden with Solvency 2 coming next year. However, given these challenges, I've actually never been more excited about the future of our Lloyd's business, and I am cautiously optimistic that we will begin to see the effects of our extensive efforts in 2011. And that's beginning in the first quarter, not the fourth quarter.

Let me talk about capital management for a minute. As we closed out 2010, we remained in a strong capital position, in our opinion, leading our Board yesterday to declare another common dividend, payable on March 15, 2011, to shareholders of record, on March 1. Last year, we repurchased 3.2 million shares of Argo Group stock, essentially making a $106.5 million investment in ourselves. Since December 31, we have continued to repurchase shares at an opportunistic pace. We will continue to closely manage capital and repatriate it to shareholders prudently, as business conditions warrant.

Let me just make a couple more comments. I wish I could say that I thought the industry was at an inflection point, in terms of the bottom of the soft market happening in 2011, but the numbers that I'm looking at, I'm not quite as optimistic as others that the market is going to turn in 2011 yet.While financial results for many companies are challenged this year, including ours, I'm still not seeing the market-wide distress that we've seen precede changes in other underwriting cycles. Jay will talk a little bit more about some of the storms that have already -- or losses -- natural cat events that have already happened this year that could change the rating environment, but we haven't seen it yet.

Having said all of that, I do believe the changes that we've made and the platform that we have will be leveraged to benefit from improvements in the economic environment and the financial markets, as those do come through during the year. So, I think we'll start to see it demand again, notwithstanding some of the capacity challenges that we have in the marketplace. And I think that the platform that we put together will start to drive some benefits during the year, and I am certainly more excited about the long-term, as things do improve over time.

So with that, I'll turn the call over to our CFO, Jay Bullock.

Thanks, Mark. I'll add some color to the numbers, and after that we'll take your questions.

As Mark described, throughout the year, conditions for both our underwriting and investment businesses were challenging, and we produced a less than satisfactory result. That said, we responded, and continue to respond to the environment, with prudent reductions in our underwriting businesses, intelligent use of our capital, reallocation of our investment portfolio, and the return of capital to shareholders. Despite the challenges as a group, we continue our trend of delivering book value per share growth. Since 2002, our book value per share has grown on a compounded annual growth rate of 12%. In addition, we returned $121 million to shareholders, in the form of share repurchases and dividends. Driving growth in book value and significant return of capital, reflect on focus on driving fundamental shareholder value. The actions we've taken and will continue to take, will position us well for improving market conditions in all facets of our business.

Turning to the financials for a moment. Our top line was down for the quarter and for the year 28% and 23%, respectively, versus 2009. With the exception of our Reinsurance segment, all of our segments experienced decreases in gross premiums written, reflecting our actions in reshaping the book, and our reactions to the market environment. It's worth taking a moment to discuss the large decline in our International Specialty segment, which had the greatest impact on the overall group premium decline. The segment for the year experienced a 45% decline from the prior year.

This reduction was caused by a combination of rate erosion on renewed risks, some risks falling below acceptable rating levels, and shifts in the portfolio of business written, de-emphasizing certain areas which we felt presented less than attractive risk-return characteristics, such as some personal accident NGA business, Transportation business, and property NGA business. The balance, and a meaningful portion of the drop in premium, was due to changes in our estimates of business written in periods before 2009. Such estimate changes were particularly large for Argo International, this year and last, and have resulted in the reevaluation of certain internal processes to reduce this volatility in our estimates. Despite anticipated process improvements, there is an inherent bias that is difficult to completely eliminate when writing cover holder business. In hard markets, premium will often exceed expectations; in soft, it may fall below. When adjusted for the premium not directly attributable to the relevant period, the year-over-year decline was approximately 35%.

Our US segments continued to show some contraction, but this was partially offset by a slight expansion in our Reinsurance segment, driven by continued expansion in our Casualty and Professional Risk business. Results for the quarter and the year were significantly impacted by catastrophe losses. Our combined ratio for the quarter of 103.6%, and for the year of 103.2%, were impacted by $16.6 million and $76.2 million, or in both instances adding six points to the respective ratios. The most significant single loss of the year was the New Zealand earthquake, accounting for $23.5 million of total net losses. By segment, catastrophe losses for the year were incurred as follows. Access and Surplus lines, $4.5 million; Commercial Specialties, $16.8 million; Reinsurance, $30 million; and Argo International, $24.8 million.

As we mentioned in our press release last night, we disclosed a preliminary assessment of losses to the recent events in Australia. Our current estimated pre-tax range of loss is between $15 million and $25 million. The losses appear to be evenly split between our Reinsurance and International Specialty segments. This loss estimate was developed taking into account a number of sources of available information and, due to the preliminary nature of the information, [these] losses could differ materially from the foregoing estimates.

Our underwriting performance for the year was mixed. We experienced strong performances, despite declining top lines in our US segments, but our international segments suffered from the reallocation of its property portfolio. Overall prior year development was favorable for the group by $35.4 million, compared to $30.4 million in 2009, as we experienced favorable development in all segments, except International. For Excess and Surplus Lines, favorable development totaled a net $19 million, Commercial Specialty favorable development was $9.8 million, our Reinsurance segment experienced favorable development of $16.8 million, and for Argo International, unfavorable development was $12.1 million. Finally, we do report a run-off segment, and in that segment we recognized favorable development of $1.9 million.

Nominally, our expenses declined year-over-year, reflecting our attention to infrastructure and the utilization of shared services across all segments. The expense ratio for the year was impacted negatively by almost three points, due to the unwinding of our debt balance in a declining premium environment. Having said that, expense management remains a priority for Argo, and the current expense ratio is unacceptable. We believe the initiatives we are undertaking will begin to address this issue.

Movements in currency exchange rates netted to a $3.8 million gain for the year, offset in our equity account by a corresponding and similarly-sized reduction in the value of non-dollar denominated assets. The increase to the effective tax rate during the year is largely a reflection of the taxes paid on realized gains that were predominantly in the US, and the fact that a portion of the loss in our International Specialty segment was ceded to our Bermuda-domiciled reinsurance company, without receiving any tax benefit.

Now, let me briefly comment on Argo's investment results. Argo's investment income for the fourth quarter was $33.1 million, down slightly from $33.6 in the prior quarter, however, up from $32.4 in the fourth quarter 2009. In the current low-rate environment, the year-over-year performance reflects actions taken during the year, to increase exposure to higher-yielding asset classes. Given the steepening of the curve at the end of 2010, total return for the portfolio was flat for the fourth quarter. For the year, the total return performance was 6%.

We continue to maintain our portfolio duration, short of expected liability duration, at approximately three years. Argo's investment portfolio remains conservatively positioned, with an overall rating of AA, and 88% of our assets are invested in investment-grade bonds. Argo's pre-tax unrealized gains position for the fourth quarter decreased to $228 million, from $268 million at the end of the third quarter; however, increased from $168 million at the end -- at year-end 2009. There was roughly an equal contribution to this year-over-year increase from our equity and fixed income portfolios.

Net realized gains for the quarter and year were $8 million and $37 million, respectively, and reflect the continued execution of our investment strategies, with the predominance of the gains coming from our fixed income portfolio. The book yield on the portfolio declined slightly during the quarter, to 3.8%, from 3.9%. We continue to believe our conservative investment strategy provides us flexibility to take advantage of investment opportunities as they arise.

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

Yes, sir. (Operator Instructions)

Our first question comes from the line of Kenneth Billingsley. Please go ahead.

Good morning.

Good morning.

I wanted to ask you a few questions.

On the comments that you talked about pricing and kind of where you expect the market to be, it doesn't seem your comments are too far of a market cycle change by 2011, but from an experience standpoint, it seems that some other specialty companies are seeing pricing to stabilize, at least in some of their own lines of businesses. It seems that you are not experiencing that. Could you maybe just comment on your own experience, on what you're seeing in the lines, and are you seeing some competitors pull away, specifically on the E&S specialty segment?

I'm sorry, maybe I guess my comments were misleading. Apologies for that, Ken.

I do see pricing stabilizing for our portfolio. In fact, as I alluded to in the fourth quarter for our E&S business, we actually saw some modest pricing improvement. But again, and I think many of our competitors may say this as well, I don't think that's because the market is moving up, I think the market -- I think the declines, if they haven't flattened, they have come pretty close to that.

When I think back to 10, 11 years ago, we bumped along, we as a market, bumped along the bottom for a while before things started to move up. And so I kind of feel like that's where we are now is bumping along the bottom. So I think we're all rejiggering our portfolios to make sure that we're in the business we want to be in and exiting the business where we don't think we're going to see any improvement any time soon.

From a growth standpoint, if the economy rebounds, do you continue to expect significant declines year-over-year, or do you think you have adjusted your business focus? And obviously, this is talking about all four segments here, as a whole, do you expect to see large declines in 2011, or do you think that's going to stabilize, especially if the economy starts to rebound?

Well, I think that the business segment that's most affected by the economy is our -- the general economy, is our E&S segment, because so many of the businesses that we insure are start-ups and there haven't been that many new business formations, or start-ups, in the US in the last couple of years. So I think that will start to help us see new business opportunities coming in for us to insure.

When I look at the decline in the portfolio, and I think this is true for the portfolio as a whole, not just E&S, the decline isn't just because of the competitive environment. The decline has been our intentional reduction or exit in particular classes in business over the last 18 months, because when we look at things over a period of time, and I'll define that as ten years, not ten months, we just didn't think that the market pricing was adequate for our long-term returns. So, I think that going forward in 2011, I don't expect to see the same sort of declines going forward that we saw in general in 2010 for the portfolio, and in the last couple of years in the E&E segment.

If you kind of go back and look, there's got -- I think we need to go back and look and talk a historical perspective of how the group has kind of grown over the last, let's say, nine or ten years. And if you go back to 2000 -- 1999, 2000, the run rate of the group's premium level was literally $150 million, or less than $200 million, and we grew that to about $2 billion in gross written premium in -- at the end of 2009. And we really felt like we needed to go back and take a look and see what was in our portfolio and make sure that everything there really met our turn goals over the long haul. And so that led to some of the reshaping of -- the intentional reshaping of the portfolio in 2010 that I don't expect to do again in 2011. As I think I also alluded to in the call, that had the effect of -- that and some other initiatives have had the effect of freeing up capital over the last 18 months as well.

Sure.

From a catastrophe perspective, obviously there were a large number of events in 2010. From a dollar standpoint, when you think about a normalized cat load for your company, did that -- did all of the events exceed what would be a normal cat load in 2010, or was it in line?

No, they exceeded what would be a normal -- what we would expect to experience from a catastrophe standpoint.

-- there were six points to the loss ratios?

In total, there were six points to the loss ratio for the year.

Do you -- can you comment on what you normally would expect, three to four points then, in a year?

I think that the amount that they exceeded -- how would I answer that question? I'd rather not answer the question in terms of specific loss ratio.

Here's the thing. We have, you know, we've intentionally increased the volatility in the portfolio by exposing the Company to more property cat events, and so it's hard to pick a -- we can pick a notional number, but there isn't an exact number. Last year, you know, I would say that we probably had a bit less than we might otherwise expect, and so it's hard to peg an exact number, but you know, it's points. It's not tens of points on the combined ratio.

Last question before I turn it over to someone else.

Just on the tax rate itself, can you give us some guidance, any expectations on where we think the tax rate, it's been up and down over the last few years?

Yes. Last year it was below 20%. This year it was above 20%. We use 20% when we estimate our -- when we report an after-tax operating income. I see no reason to think that's not a good rate. But as you see, one year over the next, a lot of it depends on where the income is generated or the loss incurred, and a lot of it depends on what happens to the investment portfolio and where those assets sit.

Sure. So, obviously, with the international business being what it was this year, then less impact, correct?

Correct.

Okay. Great. Thank you. Congratulations on the quarter.

Thank you.

Our next question comes from the line of Bijan Moazami.

Good morning, everyone.

Obviously, a lot of businesses at Argo is improving, except for International Specialty. Just want to ask a few questions to see how quickly that business might be turning around.

Number one, in particular, one thing I didn't quite understand from your comments, Jay, and also in the press release, was the downward changes in premium estimates from prior years. I don't think I've seen that anywhere before. Could you just expand on that, what really happened there?

Well, it was just that. It was a downward estimate, and so I think the question behind your question is estimates of changes in premium. A material portion of that book is written by cover holders, it's a smaller proportion today than it was 18 and 24 months ago, but inherent in estimate and booking that business from cover holders is making estimates. Because of the way the business is reported into the Lloyd's statement, estimates are established t of what you think you'll write with a given cover holder. And in effect, those estimates are trued up. As I made reference to in my comments, one of the challenges.

So in 2009, with the expansion of that binder business that had happened prior to, just prior to our ownership, we realized that we had considerably more premium coming on board. That's much of the business that we cut. When we started looking at that business, those and other businesses this year, it was not all property in 2010 that we reduced our estimates on. We realized that in a softer market, we're going to see less business.

What we've done to try to dampen the volatility is change the process of that estimation with considerably more -- and it's more intensive to get, but considerably more realtime data going into those estimates. So I am hopeful that that will begin to have the effect of dampening that volatility somewhat.

Okay.

Was that business being managed to be sold? And if that would be the case, would you guys have any recourse in a lawsuit?

So, obviously, we've asked ourselves that question a few times. And the answer is, I don't think that was the case. I think it was more a function of bringing on a number of people at one time and not closely managing them. And that happened to have coincided right at the time that we made the acquisition. So it was difficult. It was things that weren't on the books at the time that were coming on right as we made the acquisition.

And because of the way, you know, these contracts work, Bijan, they run for a year and then when you cancel them, which we started doing in 2009, they still run for another year. And so while we began canceling a number of them in 2009, we didn't finish canceling them until the beginning of 2010. And so we're just now getting to a point where those that we didn't want have run off the books.

I understand.

This business is very short tail in nature, and you guys have been cutting it aggressively. So, is it fair to assume that it will take not that long of a period before it starts turning around?

Well, that's certainly the belief. I mean, there will be a bit of a lag in premium, but we have some things that -- so we've started moving ahead. In the first quarter of 2011, we should see gross written premium beginning to move ahead from the fourth quarter, but there will still be a one to two quarter lag before we see that in earned premium.

Okay.

On a different sets of questions. Obviously, you guys have looked at the different business lines. How much expenses do you think you can take out, Mark, over the next year or two reasonably?

You know, we've been, as Jay mentioned earlier, we've been reducing expenses year-over-year for the last couple of years. As you know, it's really difficult to pull expenses back at the same rate that you're dropping premium. So, I don't think we need to do that.

But right now, what we have is, we still have a number of disparate systems around the group, and while we've been consolidating those systems together to gain efficiencies, we need to continue and accelerate that rate of consolidation, and that was really the point Jay was making in his comments earlier.

The first thing we want to do is sit and make sure we have the underwriting portfolio correct, which we now think we do. And so now, we want to turn our attention to the back office and consolidate a number of business processes and systems, which will take more than just this year. It's probably going to take 18 to 24 months before we start seeing all of the P&L impact. But it's already begun, it's not -- it's past the planning stage, it's in the implementation stage. And you should look to hear us talking about progress on expense management over the next 18 to 24 months.

Excellent.

And lastly, how much cash you guys have at the parent company and how much dividend you can take out of the subsidiaries over the next 12 months?

That's it. Thank you.

Bijan, as you know, there's two ways of looking at the dividend capacity in the US. There is the regulatory capacity for ordinary dividends and then there's extraordinary dividends above that, which is really governed by risk-based capital levels and ratings levels.

Having said that, you know, I think that there is easily $50 million to $100 million available cash flow that can be moved throughout the organization over the next 12 months, some of which we have earmarked for certain initiatives and the balance of which we'll be considering the best use of.

Our next question comes from the line of Bob Farnam from KBW.

Good morning.

I'd just like to get maybe a little bit more details on the favorable reserve developments. I'm just curious what lines you might be seeing most development from, and maybe what (inaudible) years?

Well, let me answer the second part of that question first. We -- our practice is pretty consistent and pretty well described in the K and in the Qs. And that is, we generally don't touch any of the liability lines until they're at least three years developed. So it's -- and then, translating that into where some of the positive development has come from, most of our business in the US, the predominance of our business in the US, is casualty. So by deduction then, most of the positive reserve development is coming from accident years 2007 and prior.

To the extent we have recent year property development that's positive, as an example inside of Argo Re, we'll take that much more quickly than we will the liability lines. So, inside of -- we've seen some positive development in Commercial Specialty and certain of our specialty comp lines, and in E&S what we call industrial casualty has been a good business for us, as has allied medical, just to give you a few areas.

And then the property cat reinsurance portfolio.

Right. That's why I was mentioning property. Correct. Right. Property and casualty insurance --

And Bob, we --as you know, we have a pretty robust discussion in our 10K, which will be coming out within about in the next ten days, which will go through, line by line, where the development came from.

Thank you.

And our next question comes from the line of Amit Kumar from Macquarie.

Thanks, and good morning. And, congratulations on the results.

Just going back to the discussion on International Specialty. You mentioned that there's a lag in terms of steps taken and its impact on the segment. Would it be fair to assume further premium declines in this segment for 2011?

Well, what I was saying, what when I was talking about lag a minute ago, that was the difference between written premium and earned premium, which is just, you know, the amortization of written premium over 12 months.

Oh, okay.

That's all I was referring to.

I think that it's possible that you might see a decline year-over-year for the first quarter in 2011 versus 2010, but relative to the fourth quarter, I think that we've kind of hit bottom now and we're moving ahead. That's certainly our business plan. Now, the market may -- the market is still fairly competitive for many of our classes of business, and so it may be a challenge to hit that, but the plan right now is we've kind of hit bottom notionally, and it's time to move ahead.

Got it. That's helpful.

Sort of moving on, onto the discussion on commercial insurance and, you know, I think we do appreciate the pricing commentary, in terms of how tough it is out there. Some of the larger commercial insurance companies have, in fact, talked about a modest exposure improvement. Can you sort of touch upon that, and maybe also rope in your grocery lines and tell us, you know, what's happening out there?

Yes, you know, everyone has their own point of view. Not everyone has the identical portfolio. So, I'll just leave it at that. Others may be experiencing different things than we are.

But I don't think -- I think the word is modest. So I think we're all, at this point now, talking about modest increases or modest decreases, which I think just gets back to my point of earlier, which is, I think we're all kind of bouncing along the bottom, meaning it might look modestly good one quarter and modestly not quite so good the next quarter, for a while. So, I mean, that's what I think.

That's helpful.

And final question. In terms of capital management, you've mentioned that you want to be prudent how you use it for the buybacks and there are no specific targets in place. Can you just sort of refresh us on your pieces and maybe also touch upon, you know, just based on where we are, are you still looking at teams or has that thought process changed?

Yes. Those are two different questions. Let me answer the capital management question first.

Our philosophy and our use of capital is no different today than it was two years ago or three years ago. Capital first goes to supporting the balance sheet and what currently exists on the balance sheet. Second, it goes to supporting new growth initiatives, and I'll define those as organic. Third, to any acquisitions that we think strategically move our business ahead. So they're not just financially motivated but strategically motivated. And then to the extent that after looking at all three of those items, we believe we have excess capital left over, then we think pretty hard about what to do with it. And you saw haw we used some of that capital this past year by repatriating it back to shareholders through both dividends and share repurchase. We announced this morning the declaration of a quarterly dividend and the -- we reloaded the share repurchase plan to another $150 million. We -- you shouldn't assume by that that we don't have any strategic opportunities, but rather we think that we have the ability to look at strategic opportunities and still repatriate capital back to our shareholders, particularly given where our share price is trading relative to book value.

Our preference, Amit, is still to look at teams. Asset prices are starting to decline to the point where it's almost tempting to start making acquisition again -- acquisitions again. And so we do have a number of things that we're looking at. But I will say that the pipeline is still not as full as it would have been three, four, five years ago. And that's intentional. It's not that the opportunities aren't out there, we just don't think that the pricing makes sense, and to be fair, I think our platform is broad enough now to where we're actually able to attract a lot of underwriting talent that historically we might have had to acquire by acquisition.

So we're looking at a range of opportunities right now to continue growing the business. So I think I would still put teams first and acquisitions second, but I would certainly put both of them back on the list.

Got it. Thanks for your answers.

(Operator Instructions)

Our next question comes from the line of Doug (unintelligible).

Hello. Good morning. I just have one last question, and probably a pretty easy answer.

In the fourth quarter, was there any residual or reinstatement premiums that may have been triggered by reserve development or other catastrophes in the international business? It may have knocked down the premium number.

Not that I'm aware of.

Okay. Thanks. That's all my questions.

And your next question comes from the line of Howard Flinker from Flinker Investments.

Hello. I have a few questions about taxes.

On your gains, are those taxed as if they're gained in the United States or in Bermuda?

If the invested assets were held in the United States by our US companies, then they're taxed at the US rate.

Do you have those numbers, or should I get them after the conference call?

Sorry. The number -- the actual tax number on those gains?

Yes. I want to compute return on capital.

Most of the gains --the majority of the gains, almost all of the gains were either in the US or in the U K. Assets actually held in those jurisdictions. In both instances, they're taxed at ordinary income.

So what's that -- ordinary income, so what's that, 35%, 38%?

35% in the states and 28% in the U K.

Got you.

And as to -- the same question applies to interest expense. Is that money borrowed in the US and deducted in the US at the US rate, or was it borrowed in various places?

If you look at the schedule in last year's 10K, which I only refer you to that because this year's hasn't been published, but there hasn't been a material change in our debt structure. You'll see that there's debt -- there's non-equity capital in three different locations. The majority of it is in the US, the second largest piece is in London, and then there's approximately $60 million, $65 million in Bermuda. So obviously the Bermuda deduction, there is no deduction on Bermuda interest expense, then there's full deductions on the US and London pieces.

Right.

And penultimately, is foreign exchange as you would do -- calculated in your income statement, taxable or non taxable?

It's -- first off it's not a realized -- some of it is realized and some of it is not realized.

Yes, I know that.

But there would be a provision, in either case. And most of that would be in our London business.

Approximately 28%?

Yes.

Okay.

And finally, in your international business, which you wish to contract, or are contracting actually, when you go to a customer or when you look at a customer, do you say no, we're not even going to renew him for the year 2011, or do you go to the customer and say "Yes, we could renew, but our rate is up -- I'll take a number, 100%"? That's a nice way of saying no. Which is your approach?

Well, it just depends. A lot of it isn't necessarily related to any one customer but rather aggregate exposure in different parts of the world. And to the extent it's an aggregate issue, rarely do we actually talk to the policyholder. We almost are always talking to the wholesale broker in London. And so usually it's a quick no, unless someone -- unless it's a renewal account that we've had for a while, and if we like it but we need a bit more rate, then we'll take the latter approach that you suggested.

So essentially, in the parts of the world or in the lines that dislike, you're just discontinuing them, and you're not saying --

Well, there are very few places where we're actually just getting out. We're primarily either reducing our exposure relative to an area in the aggregate, so it's a policy here, a policy there, or there may be particular risks that we just don't like, or trading relationships that we think are better unwound.

So for the most part, it's a no to a particular segment, rather than no but if you want to pay 33% more, we'll take it?

It's mainly just no.

Okay. Thank you.

And we have no further questions in the queue.

I'd like to turn the call back over to CEO Mark Watson. Sir?

Thank you, everyone, for joining us today.

I'd also like to thank everyone's patience. 2010 has proved to be a pretty challenging year, and I'd like to conclude the conference with where I ended my remarks a bit earlier. And that is, I actually think that we've done some pretty good work in 2010 and are now in a good place to move ahead for 2011. I like the way that our portfolio in the aggregate looks, and also our individual business units' portfolios. I think we have a very good team of people, and I'm looking forward to moving ahead and being able to talk about that over the course of 2011.

I'd like to thank all of our employees for their hard work in 2010, and I look forward to speaking to you at the end of the first quarter. Thank you.

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