Mark Watson - Chief Executive Officer Jay Bullock - Chief Financial Officer Susan Spivak Bernstein - Senior Vice President of Investor Relations.

Chris Martin - Macquarie Dan Farrell - Sterne Agee Adam Klauber - William Blair Bret Shirreffs - KBW Ken Billingsley - Compass Point.

Good morning and welcome to the Argo Group, third quarter 2014 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). Please note that this event is being recorded. I would now like to turn the conference over to Ms. Susan Spivak Bernstein. Please go ahead..

Thank you and good morning. Welcome to Argo Group's conference call for the third quarter and nine month 2014 result. Last night we issued a press release on earnings, which is available in the Investor section of our website at www.argolimited.com.

With me on the call today is Mark Watson, Chief Executive Officer; and Jay Bullock, Chief Financial Officer. We are pleased to review the company's results for the quarter and the nine months period, as well as provide you with management's perspective on the business. As the operator mentioned, this call is being recorded.

Following the opening remarks you will receive instructions on how to queue in to ask questions. As a result of this conference call, Argo 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, 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’m pleased to turn the call over now to Mark Watson, Chief Executive Officer.

Mark. .

Thank you, Susan. Good morning everyone and welcome Argo Group’s, third quarter 2014 earnings conference call. I’ll briefly share my thoughts regarding the highlights for the quarter, after which Jay Bullock, our CFO, will add some comments to the financial results.

We look forward to responding to any questions you may have during the Q&A portion following our remarks. Argo posted a solid third quarter results with net income per share up over 50% from the prior year.

At September 30, 2014 book value was $62.99, up 9.8% over the past 12 months and tangible book value per share was up even more at 11.5% year-over-year. Book value per share plus dividends has compounded at an annual rate of 10.5% since 2002, continuing our track record of shareholder value creation.

Third quarter 2014 net income was $44.7 million or $1.69 per share, up from $31 million or a $1.12 per share in the third quarter of 2013 or an increase of 44% and 51% respectively. Comparable figures for the nine months just ended show an increase of 30% and 36% respectively.

Our third quarter 2014 operating earnings were $0.89 per share, compared to $0.80 in the comparable quarter last year or an increase of 11%. For the first nine months of 2014 operating earnings grew to $2.72 per share from $2.24 in the same period of 2013 or an increase of 21%. We continue to see tangible improvement in our underwriting results.

For the nine months ended September 30, 2014, our underwriting income was $40.6 million, up from $15.7 million in the same period of 2013, and despite the decline in investment income and its impact on operating earnings, we continue to see good results in the investment portfolio from a total return perspective given the prevailing rate environment.

I’ll comment more on this in a moment. For the quarter we produced consolidated gross written premiums of $497 million, which is up slightly from the year ago period. For the nine months our consolidated gross written premium was $1.48 billion compared to $1.475 billion in the same period of 2013.

As we have pointed out over the last several quarters, the reported top line numbers are somewhat misleading as underlying growth in selected lines has been offset by planned reductions in lines that are not meeting our profit objectives.

We posted an improvement in the combined ratio to 96.4% for the quarter compared to 97.5% in the third quarter of 2013. During the quarter we repurchased 207,000 shares of stock at an average price of $52.12 for a total value of $10.8 million.

Capital management has been a key part of our strategy for value creation and over the last six years we’ve retuned more than $360 million of capital to shareholders through share repurchases and dividends.

We will continue investing in our stock at these prices and retuning capital to shareholders, while remaining focused on our main priority, which is building the Argo franchise. Spending just a moment of market conditions, competition has increased in virtually all classes of business that we write.

It’s probably fair to say that such increase has accelerated even since the last time we spoke on this call. That said, we continue to find opportunities to growth in areas where we believe we have a competitive advantage.

In addition we have a number of initiatives underway that we believe will allow us to grow those opportunities more rapidly in the coming years, even in this environment. .

First, the planned reduction in our transportation line as we continue to runoff the commercial auto book. Second, we continue to see a fundamental shift in the larger shared risk property market, where several companies have material increased their limit appetite, and as a result are writing the business outside the traditional wholesale market.

Excluding these two lines of business, the growth in our E&S platform would have been close to 15% in both the third quarter and nine month comparisons to 2013. You may recall me making this exact same comment on the call last quarter.

On average, rates were down modestly by less than 1% across the segment with the biggest decline surprisingly in certain excess causality lines of business. Prior year development continues to have a positive impact on our results in E&S and Jay will go into more detail in his discussion on loss reserve development.

On a current year basis, excluding catastrophe losses in reserve development for the quarter, our loss ratio improved to 58.6% compared to 59.2% in the third quarter of 2013 and to 60.3% and 61.3% for the nine-month period. In our commercial specialty segment overall premium was $138 million, which was flat with the year ago period.

Growth at Argo Surety, Rockwood, our mining business, and some of our other programs was offset by declines at Argo Insurance and Trident, our food merchant and public entity business respectively and recall that this was the same case a quarter ago.

Overall rate increases for the quarter across the segment were up 3.8% with higher increases in those lines that needed the most. For example, at Argo Insurance rate increases averaged 9% across the segment, representing several consecutive quarters of meaningful rate improvement.

Renewal retention ratios remain strong and we are encouraged by a number of new business opportunities. The segments loss ratio excluding catastrophe losses and reserve development was 58.5% in the third quarter of 2014 compared to 59.6% in the same period a year ago.

And for the nine-month period the loss ratio was 59.9% compared to 62.3%, which I think is a nice improvement. .

Rates in general remain under pressure affecting all businesses. The segments loss ratio excluding catastrophe losses and reserve development was 47.6% in the third quarter of 2013 compared to 49.3% in the same period of 2013. So we still had a nice improvement in our loss ratio.

Turning to Syndicate 1200, as you may recall, last quarter in commented that Lloyd's is perhaps the most challenging broad market environment; unfortunately this hasn’t changed. Competition continues to escalate and new profitable growth opportunities are hard to find. Having said that, we are finding a few.

While we are working on a number of new initiatives, we will do what’s right for the long-term profitability of our Lloyd's platform. Gross written premiums written were essentially flat with the year ago quarter, however margins remain favorable.

On an underwriting basis, the loss ratio excluding catastrophes and reserve development was 54.9% in the third quarter and 55.6% in the nine months period ending September 30. This is despite once again the incidence of several large non-catastrophe related losses in the quarter, a trend that has continued to cross the market for several quarters.

Turning to our investment portfolio, we continue to be pleased with the performance achieved through the first nine months of the year, given the backdrop of the fixed income markets. Argo’s portfolio was down a modest 0.3% during the quarter, bringing year-to-date performance to 2.5%.

Our year-to-date return on the investment portfolio totaled $104 million, which compares favorably to the $54 million earned through the first nine months of the period for last year. As of the end of the third quarter, the fixed income portfolio of duration of 2.5 years is roughly flat from the prior quarter of this year.

Net investment income totaled $20.8 million in the third quarter. Investment income was flat quarter-on-quarter and down $3.3 million versus the same quarter of last year. Year-to-date investment income is pacing at about 84% of prior year actuals. Low investment rates continue to pressure our portfolio book yield.

Argo has continued to fund new investment mandates that generate new money yields in excess of the bond portfolio book yield, but some of that shows up in realized gains in the income statement, not in operating income, which Jay and I have been talking about, and Jay will get into more in a minute and then we’ll take about it in the Q&A.

In closing, the results for the nine months of the year demonstrate overall improving performance of our platform. We continue our focus on reporting consistent results that will generate stable returns for shareholders. With that, I will turn it over to our CFO, Jay Bullock..

Thanks Mark and good morning everyone. I’ll take everyone through some additional detail on the financials and then we’ll open it up to Q&A. In the nine months of 2014 we continue to see validation of our efforts to increase underwriting income and grow our most profitable business lines.

Mark talked about the underlying growth trends and mentioned the improvement in underwriting income. For the nine months of 2014, underwriting income more than doubled the 2013 result.

This improvement is a result to better risk selection, a more effective reinsurance purchase, reduced level of catastrophe losses relative to last year and the continued support of favorable development from prior accident years. And as Mark said, we’ve seen this trend despite the continued frequency of non-catastrophe related large losses.

We continue to maintain our focus on improvement in underwriting income. For the quarter, away from the current accident year we experienced overall favorable reserve development $3.1 million, representing our fourteenth consecutive quarter of overall positive reserve development.

The largest component of development this quarter was continued strong results out of our prior years in our E&S business, primarily from contract and causality lines. Total favorable prior year development from the E&S segment in the quarter was $12.9 million.

The three other business segments were essentially flat, although as always there was small ups and downs by business unit. These were partially offset by an increase to reserves in the runoff segment.

Runoff had unfavorable development of $10.6 million, due to $6 million from asbestos and environmental driven by exposures to asbestos that were written many years ago on a primary basis and $4.6 million in risk management workers compensation. The primary asbestos development was due to increased severity, largely from defense costs.

In general many of these accounts are remaining open longer than anticipated and as a result the defense costs for those insurers continue to grow. The increase in workers comp was largely due to the reevaluation of one dramatic injury claim. The table in the press release provides a full breakdown for the quarter and nine months.

We posted a 0.3-point improvement in the current year accident non-catastrophe loss rate of 56%. Catastrophe losses for the quarter were relatively modest at $5.5 million due to various small events. In addition to U.S. storms, the number includes small losses from events in China, Canada and Mexico, none-of which individually was more than $2 million.

In the quarter we reported $12.9 million of net realized gains, the largest contributor to the gain was from our alternative investments as Mark mentioned, in addition to the equity portfolio and gains from certain private equity and strategic investments.

Since the beginning of 2013 we estimate the incremental value added from the alternative allocation relative to foregone investment income has been an excess of $15 million.

In addition as we reported last quarter, we retired a trench of our trust-preferred securities at a discount and the gain on that transaction, $2 million, is included in the total.

For the third quarter of 2014 the effective tax rate for the group was 7.5%, the lower than expected tax rate was largely a function of a greater proportion of income related to our Bermuda entities. We saw a similar trend in the third quarter of 2013.

Turning to the balance sheet, the sum of investments in cash decreased by approximately $52 million since the year-end 2013. For the nine months ended September 30, total return on the investment portfolio was approximately $115 million.

Offsetting the increase was the settlement for the 2009 and prior reinsurance to closed transaction of the Syndicate, the redemption of the trust preferred mentioned a moment ago, funding of the share repurchase program and dividends paid and other smaller items.

Adjusting for these items, cash flow was neutral, while we saw increases in other items, notably premiums receivable, which should lead to positive cash flow. Paid claims for the nine months were down slightly from a year ago. As mentioned in the press release, the nine months stock buyback total was $42.2 million.

Since quarter end we’ve continued repurchasing shares and have spent an additional $7.4 million in share repurchases at an average price of $51.84. We ended the quarter with a fee tax unrealized gain position of $240 million, down from $285 million at the end of the second quarter of 2014.

The decline in asset values was most pronounced in the fixed income portfolio as dollar strengthening led to a decline in the value of non-U.S. dollar denominated assets, and credit spreads widened generally during the quarter. Operator, that concludes our prepared remarks, and we are now ready to take questions. .

Thank you. (Operator Instructions). Our first question comes from Amit Kumar of Macquarie. Please go ahead..

Hi, this is Chris Martin today actually. Congrats on the quarter. So just to start off, as one of your recent underwriting actions take hold, can we visit (ph) the topic of the double digit ROE. What might sort of be the timeframe to get there and how should we think about it in the context of other headwinds such as interest rate environment..

That’s a multipart question. We’ll start with the last one. With interest rates, two or three years ago I think we would have thought interest rates by now would be at least 200 basis points higher, meaning yields would be 200 basis points higher; they were not.

The market is more competitive today than we thought it would be two years ago, so our top line hasn’t grown as fast as we thought it would have grown.

As I mentioned in my remarks, there’s still opportunities for us and we’ll continue to grow, but we may not grow quite at the pace that we thought we would have and I think that a better way to think about return is relative to the risk free rate, and we think a reasonable return is 700 basis points over the risk free rate, and as long as the risk free rate stays as low as it is, I think its pretty challenging for the insurance company to be generating double digit returns in this interest rate environment..

Got it, thanks. So then sort of following up on that, are those any initiative revisited like your investment allocation is a to risk your assets and you touch upon how much of your net realized income has come from, your hedge fund strategy and alternative investments.

Could we sort of revisit where those are and sort of is there any potential to changing in how you maybe allocating your funds moving forward?.

When you say potential, do you mean – are you asking if we will continue to allocate more to our alternative portfolio?.

Yes, and sort of even more of a broader move from fixed income generally to moving more of a percentage into the alternative hedge fund space..

Yes well.

So if you look at our investment portfolio over the last 30 years, you’ll see that we’ve been pretty – I was going to say aggressive, I don’t think that’s the right word, but we’ve been pretty nimble in how we’ve allocated our investment portfolio among different asset classes, primarily between investment grade fixed income and public equities.

Over the last five years, particularly over the last three we’ve taken part of the portfolio that we would have allocated to public equities and put it into more hedged strategies.

They are mainly credit strategies, although there are a couple of equity strategies within the alternative portfolio and that now makes up about 10% of the portfolio and Jay can correct me, in a minute can be more precise.

I think that we’ll continue the evolution because we see good opportunities; its not necessarily because we are trying to chase yield. We found good opportunities that we think actually have less volatility than our fixed income portfolio and so as we find new opportunities to invest money in alternative strategies we’ll continue that evolution.

But in terms of what that means to investment income, Jay I think you said in your remarks that that’s probably about $15 million worth of operating income so far this year..

Well, what I was referring to is that the incremental value add from these strategies are up since the beginning of ’13, so this is say half of it. In any given period its $7.5 million. We would have made the same, against foregone investment income.

So if you were going to make a return on the cash, we are making that return plus an additional $15 million over that period of time..

Okay, good thanks. It’s very helpful. And just one last comment, you mentioned that you have, I think you said $4.1 million in buy back so far in the fourth quarter.

So the stock has had a good run recently and could there really be any sort of change to the pace in your capital management as the stock trades at a higher multiple than it had previously..

Well, I’ll give you the same answer I give everyone every quarter. Capital is primarily to support our balance sheet, both the liabilities and the assets and to support organic growth in the company.

To the extent that we think we have excess capital beyond that, then we repatriate that capital back to our shareholders, either in the form of stock buybacks or dividends. As our share price approaches book value, it makes us think about whether we might want to adjust our dividend policy in addition to stock buybacks.

I would note that over the last several years we have raised our dividend more than once. We paid a stock dividend a year ago as well and a few years before that we paid a special dividend. So I think all of those are still on the table to the extent that we have excess capital..

Great, thanks. That’s very helpful. That’s all I have for today and good luck..

Thank you..

Our next question comes from Dan Farrell of Sterne Agee. Please go ahead..

Hi and good morning. You’ve been showing some good momentum in sort of core loss ratio improvement over the last few quarters and I’m wondering, looking at the current rate environment that we might be facing going forward, how do you think about the potential for further improvement or other levers that could offset any rate headwind. Thank you..

So if you look at the classes of business where we are growing, the loss ratio on average is less than the group loss ratio and that’s really where we are putting all of our investment dollars, both in technology to support the underwriting and our distribution management and in new products that are complementary in those classes of business where we see the most margin..

Okay, and then just on the expense side, I mean we are definitely still I think seeing slower expense improvement on the expense ratio than you may have thought initially. I’m wondering, you also made the comment that you’ll sort of do the right thing longer term to sort of have momentum for the company.

How do you think about the investments that you are making or the trade off of a slowdown in expense ratio benefiting the loss ratio or benefiting the overall underwriting results? I’m just wondering how you sort of weigh those two things. Thanks..

Well, most of investments that we are making are much more long term focused and when I look at what we are spending relative to what we planned in absolute dollars, it’s pretty close to what we planned.

There’s a couple of projects where we’ve spent a few million dollars more than we planned, but in the aggregate we are pretty close to where we thought we would be. The challenge is that in the current environment we are not growing quite as quickly as we planned a couple of years ago to be today.

So if you then look at things on a ratio basis, the ratios don’t look quite – the expense ratios in certain classes don’t look as good as we thought they would have been, because the growth hasn’t been there yet, but its still coming.

So I’m appreciative that if you just focus on the expense ratio, it is higher than we thought it would have been right now, but if you focus on how we’re investing, I’m pretty comfortable with that and I see growth coming where we’d like to have it and so I think the investments that we are making will continue to payoff.

It just may take a little bit longer than we planned and a little bit longer, is quarters not years..

That’s very helpful. Thank you..

Our next question comes from Adam Klauber of William Blair. Please go ahead..

Good morning everyone. A couple of different questions, I’ll start with top line. You know clearly that business is a little tougher.

You’re still showing some growth, but if that continues, will acquisitions come back on the table?.

Well, you know Adam, acquisitions I would say have always been on the table, but for a couple of years when we were consolidating the three businesses together, meaning the original Argonaut, the Bermuda company and the Lloyds platform, that’s pretty much done now.

We’ve been looking at a number of opportunities over the last couple of years which we’ve talked about from time to time on calls, but things just haven’t been a really good fit, mainly because of price and while we’d like to give critical mass soon rather than later and acquisitions help us do that to the extent that they are in line with our business strategy, we haven’t found the right thing that we are willing to pay up for, but we are going to keep looking..

Okay, okay, thanks. And then going back to the E&S business, I think you said excluding a couple of lines you’re growing, 15% which is pretty strong, have you seen any more interest from these standard carriers in keeping some of those risks or has their risk appetite been pretty consistent these days..

It depends on the market. I would say that in the U.S. the appetite has been pretty consistent. Europe is kind of all over the place and in Brazil we’ve seen some of the larger carriers really reducing their risk appetite quite substantially over the last few months.

Our submission flow in Brazil right now is up 100% year-over-year and we think that’s almost entirely a function of our competitors reducing their risk appetite..

Okay, thank you. And then how should we think about reinsurance. I mean obviously you buy a lot and your book is well protected and your cap also is much, much lower than its been in the past, but is the potentially used reinsurance actually to lower your expense ratio more going forward..

Well, we are certainly looking at that. Let me say it differently, right now and for the last 18 months we’ve been buying less reinsurance and by keeping more risk, that’s actually helped our financial results.

If you look at our loss ratios on a gross basis versus net, you can pick almost any time period and gross outperforms net, which is why we’ve been keeping more risk.

If reinsurance pricing does move to a point where it makes financial sense for us to buy more reinsurance, and I’ll define financial sense as it goes straight to the bottom line directly or I should say immediately as compared to capital relief, then I think we’ll definitely look at buying more reinsurance, but that’s the only reason that we would.

We have plenty of capital to support the risk on our balance sheet, so it doesn’t make sense for us to buy more reinsurance as a substitute for capital..

Okay, okay, thank you very much..

Our next question comes from Bret Shirreffs of KBW. Please go ahead..

Yes, good morning and congrats on the quarter. Mark, in your prepared remarks you mentioned some initiatives to help support growth, kind of regardless of the external environment. I’m just wondering if you could expand on that a little bit..

Well, there’s a lot of them. Let me just hit on a couple and I probably talked about some of them on previous earnings calls.

The biggest investment that we’ve made in the last couple of years has been on helping our wholesalers trade with us more easily in the U.S., mainly for small commercial accounts, either on a package basis or in our small casualty business, and as those systems come online for more and more of our wholesalers, we are seeing much more submission flow and we are seeing much more take out.

But I think I mentioned in my remarks that E&S absent property and commercial auto was up 15%, and a lot of that’s being driven by the investments that we are making on that small account business and we are just beginning to see the benefit of that. We are going to see more and more over 2015 and 2016.

I don’t think we’d really get the full benefit of what we are doing today until the beginning of 2016. So we’ll see it continue to improve I believe all during 2015 and then I think it really starts to move the needle in the first quarter, probably fourth quarter of 2015 and first quarter of 2016..

Okay, that’s really helpful. And then another nice quarter of realized gains and you talked about this also a little bit earlier, but I was wondering if you could just expand on the composition of the other investments category and also what you are expecting in terms of returns for those investments..

Yes, so let me start and then Jay, why don’t you jump in in a minute. So again, we think of our investment portfolio in two pieces, of what we call our core portfolio, which is primarily investment grade fixed income.

Most of that’s in the U.S., but its also in several other jurisdictions, depending upon where we need invested assets to pay claims and that approximates 70% of our invested assets, give or take 100 basis points. The remainder we referred to as our capital appreciation portfolio. The largest part of that is large cap public equities.

They are mainly global businesses that are listed either in the U.S. or in Europe, but mainly listed in the U.S. And then it also includes other components, which a lot of people refer to as alternative assets.

In our case they are primarily credit strategies that are run by hedge funds, although there are also some equity strategies and I think I mentioned earlier, that makes up about 10% of the portfolio and all of the movement up and down in those hedged strategies runs through the income statement as realized gains and losses each quarter and so you don’t see that – so sorry, for our fixed income portfolio and for our public equities the movement is tracked on the balance sheet and unrealized gains.

But for all the hedge strategies, all of that runs through the P&L each quarter in the realized gains section. Jay, do you want to add anything..

No, I think that’s the right sort of characterization and I think the only thing I will add is one of our focus has been a lot of diversification in this portfolio. So we’ve got away from some of our larger sort of legacy equity allocations, which managers that we’ve worked up for more than 20 years.

We’ve done allocations that are in the $20 million and $30 million range to a number of different strategies. .

Yes, so I just would make two other points. One, we’ve always run a pretty balanced portfolio.

I’ve been running the company for 15 years now and one of the reasons that I invested in the company back in 1998 was the company’s ability to manage both sides of the balance sheet and I think that as our ability to take underwriting risk when market conditions allow, has ebbed and flowed, so has our investment portfolios asset allocation.

And I think the only other point I would make is that while we have million of dollars less in investment income now than we did before, most of that is now showing up in real live gains on the income statement and has been for the last couple of years..

Okay, that’s very thorough. If I could just squeeze a couple of quick ones in here, Jay a couple, of course you mentioned that you have $100 million to $150 million of capital back in the run off reserves.

Is that number still kind of consistent today and how would you expect that to evolve over time?.

Well, I expect it to trail off very, very slowly in the same way that I expected those run off reserves to be paid out very, very slowly..

Yes, with what’s left..

With what’s left, right. So they are relatively small amounts. The A&E exposure in total is $50 million and the comp in total is $200 million..

Yes, whereas 15 years ago A&E was $300 million and the comp was almost $1 billion. .

And if you look at the slope of the reduction for example in comp, its what you would expect. It comes down fairly rapidly and then it starts to go not flat, but it starts to take a much more general decline, because you have a number of unfortunate long claims left in the portfolio..

Okay, that’s helpful and then….

But we do record some investment income..

Yes, you announced a couple of relatively significant high profile hires in the last couple of months. I was wondering if you could just comment on those and how that changes some of the responsibilities of the organization..

Yes, let me talk about that. I actually meant to talk about that in my remarks. The biggest change that we’ve made since the last earnings call – wow, we’ve made two. So we have reorganized how we run the company and well, let me rephrase that.

We don’t run the company differently, but I’ve brought someone in to help me run the international business and that’s Jose Ribeiro. Jose most recently ran the insurance business for Generali. Before that he ran the International Operations of Lloyds for a number of years and before that he was responsible for the Latin American operations of Willis.

And so if you think about how we’re organized, in the U.S. we have our excess and surplus lines of business and then what we call commercial specialty.

And a year and a half ago I asked Kevin Rehnberg to come and run the U.S., so I could focus on the international business and over that time we’ve recruited David Harris to run the Syndicate and Jose to now come in and run everything outside of the U.S. as a joined up strategy, which is really how we think about it.

I guess the exception to that would be our reinsurance business, Argo Re, which also reports to Jose now, but even that is pretty joined up with what we are doing with the Syndicate and particularly in the Far East. So I think that’s a real good fit for our company going forward.

We’ve also added or I should say, we have replaced – Andrew Carrier is the head of underwriting who joins Everest Re, actually starting next week with Axel Schmidt who joined a couple of months ago. Axel was most recently at Aviva and prior to that was at Zurich for most of his career, mainly in specialty lines.

So Axel’s really picked up where Andrew left off with his broad casualty experience and I look around the table today and I think I’ve got the best management team I’ve had since I’ve been running this company over the last 15 years. So I’m pretty fired up..

Okay, thanks and good luck..

Thank you..

Our next question comes from Ken Billingsley of Compass Point. Please go ahead..

Good morning. I just wanted to ask three questions here. One, on the cap losses in general, I saw obviously they were down for the quarter, but you mentioned what a lot of people have talked about as non-cap weather.

Can you talk about maybe how you’re avoiding some of those risks that maybe others are seeing an increase, that even the ones that don’t have quite a lot of property business? And will your international, and I’m going off the comment you made; will you international business increase some of the risk because of the change in business mix?.

Ken, I’m not sure I understand the last part of your question with the international piece. I don’t know that there is necessarily any more risk in our business outside the U.S. than there is inside the U.S.

As respects, the property losses in the U.S., I can remember sitting on these calls in previous years, usually at the end of the second quarter, talking about how its amazing that every church we insured in the mid-west happened to have been hit that quarter.

So while we have avoided some this quarter and last quarter, I’d like to say it is expert underwriting acumen and we have changed our portfolio to get out of some of those tornado prone areas, some of it is probably a little bit of luck as well.

Having said that, some of the large property losses that we’ve had at the Syndicate over the last couple of quarters I think is just the opposite. I don’t think it’s that our portfolio has changed, I think that we’ve just kind of been unlucky.

If I look back over the last however many years, some large losses whether its property or casualty, they tend to kind of come in waves and its not always a function of underwriting, its mainly just a function of timing.

And as we’ve grown and become more diversified, some losses that moved the needle years ago that we would talk about, we don’t talk about as much now because they are spread out over a lager income base. .

Very good. And on the international side I though I heard a comment that was talking about increased property losses and that’s what I was referring to. .

Yes, no we did. We were saying at the Syndicate that we had more than we usually do, but I think that’s just a function of timing as opposed to risk portfolio. .

Okay. On the alternative investments and actually just kind listen to the non-fixed income portion and the fact that you’ve changed some of the investment strategy over the last I guess couple of years. Can you just talk about what the trade off there is from a statuary capital perspective or just how it is treated.

Was there a tradeoff by moving those investments obviously from fixed equities to maybe from equities into hedge alternative investments?.

Yes in some cases there is, right, and in some cases some of those assets sit in jurisdictions where we have a bit more flexibility if you will or a bit less of a statutory capital impact. But clearly, they consume – from a regulatory basis, they clearly consume more capital than traditional fixed income.

When you look however at a more dynamic modeling of all the risks in the portfolio, and by that I mean all of our insurance risks and all of our asset risks and then you look at the underlying strategies that we’ve invested in, on an economic capital basis, they actually don’t consume a lot more capital. .

:.

And I’m assuming you are talking about obviously the $15 million you referenced through excess returns and to operate earnings (inaudible)..

Well, its just overall total return. But yes, that would be a measure of that benefit. .

And when you discuss that $15 million, that’s not – I mean those are actual booked realized gains, not something that hasn’t been sold yet and it’s flowing through.

I mean that’s actually booked gains to book value, is that correct?.

Yes, it’s reflected in book value. That particular number just so happens to have come though an addition to a larger number, but it has come through the realized gains and looses. So its been recognized if you will through the income statement. .

But it’s not an unrealized gain that’s flowing though the income statement. Its actually cash in hand. .

Its cash in the hand of the portfolio manager. .

Got it, okay, all right. And the last question I had, just this is on the fee income line.

I know it was small in quarter, but could you just briefly discuss what is coming in through the fee income line and maybe what creates some of the volatility there?.

Well most of the fee income line comes from our program operators in the U.S.

and we’ve got a lot of moving parts there as we reconstruct some of the businesses that we have within, that’s the Alteris (ph) part of the commercial specialty and as some of the insurance companies have been changing their risk appetite in the U.S., they’ve been getting in and out of program business, which means some of the markets that we use have been getting in and out, in this case out, and so the revenue stream has been pretty lumpy there in the last couple of years and probably will be for another year.

.

Very good. Thanks for taking my questions. Congratulations on the quarter. .

Yes, thank you. Hey Brett, I wanted to come back to your question you asked a minute ago.

Susan made me stop talking, because I was talking about people too much, but there was one other thing that I wanted to add and that is by moving Jose Ribeiro into the role of Head of International, it freed up Nigel Mortimer, somebody else that we issued a press release about, actually earlier this week, to take on the business development and strategic planning role.

This is a lot of what Barbara Bufkin used to do, many of you know Barbara, and so it allows us to really focus and get more strategic on how we are looking at future and investing in the future and I think that’s a really important part of how we focus strategically going ahead. .

And at this time I’m showing no further questions. .

All right. I’d like to thank everyone for being on the call today. A lots happened since the last quarter and I think we are doing a good job of getting focused. A lot of the initiatives that we’ve been working on are staring to payoff.

I want to thank everyone for their questions, particularly about people, because I think that’s the biggest strength that we have going forward and I am looking forward to talking to you all at the end of the year about the fourth quarter. Thank you again for joining us on the call today. .

Thank you. The conference has now concluded and thank you once again for attending today’s presentation. You may now disconnect..