Platinum Underwriters Holdings, Ltd. 3Q08 (Qtr End 9/30/08) Earnings Call Transcript

| About: Platinum Underwriters (PTP)

Platinum Underwriters Holdings, Ltd. (NYSE:PTP)

Q3 2008 Earnings Call

October 22, 2008 8:30 am ET

Executives

Michael D. Price – Chief Executive Officer

James A. Krantz – Chief Financial Officer

Neil J. Schmidt – Chief Actuary

Analysts

Josh Shanker - Citigroup

Ian Gutterman - Adage Capital

Jay Cohen - Merrill Lynch

Larry Greenberg - Langen McAlenney

Matthew Heimermann - J.P. Morgan

Operator

Good morning, ladies and gentlemen, and welcome to the Platinum Underwriters Holdings, Ltd. investment community teleconference to discuss the financial results for the quarter ended September 30, 2008. This call is being recorded. A press release with these results and financial supplement, along with access to the webcast of this call, is posted to the company's Investor Relations section of their website at www.PlatinumRE.com.

Management believes certain statements on this teleconference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to the historical or current facts and can be identified by the use of words such as may, should, estimate, anticipate, intend, believe, predict, potential or words of similar import generally involving forward-looking statements.

These forward-looking statements are based upon the company's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the company's future financial condition and results. The uncertainties and risks include, but are not limited to, those disclosed in the company's filings in the Securities and Exchange Commission. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the company.

Additionally, forward-looking statements speak only as of the date they are made, and the company assumes no obligation to update or revise any of them in light of new information, future events or otherwise.

At this time we'll turn the call over to Michael Price, Chief Executive Officer of Platinum.

Michael D. Price

Thank you, Operator. Welcome to this morning's call. With me today are Jim Krantz, our Chief Financial Officer, and Neil Schmidt, our Chief Actuary. After providing an overview of our results for the quarter I'll turn the call over to Jim, who will fill in some of the details. After that I'll discuss recent underwriting activity, update you on our capital management activity, comment on our investment portfolio, and provide our outlook on market conditions. Then we'll be happy to take your questions.

We produced a loss of $45 million in the quarter, which equates to a loss of $0.99 per common share. The net loss reflects significant catastrophe losses and modest writedowns in our investment portfolio. Favorable reserve development was a partially offsetting factor.

Our book value per share decreased 9.1% to $33.64. The decrease reflects our net loss for the quarter as well as an increase in unrealized losses in our investment portfolio. Year-to-date through September 30th, our book value per share decreased 1.3%.

Net premiums earned were approximately 3% lower than the same quarter last year as growth in our Property and Marine segment was more than offset by declines in the Casualty segment.

Jim will now take us through the numbers in more detail. Jim?

James A. Krantz

Thank you, Michael, and good morning to all of you on the call. I will now provide some highlights for the quarter ended September 30, 2008 and add detail to various items.

Our net loss for the quarter was driven by the net adverse impact from major catastrophes in the quarter. The net after-tax impact from Hurricanes Gustav and Ike in the third quarter was $124.3 million and is consistent with ultimate net after-tax estimated losses from these hurricanes of approximately $120 million. The difference is attributable to reinstatement premiums that will be earned subsequent to September 30, 2008.

Also impacting the net loss for the quarter was a net realized loss on investments of $18.2 million as compared with $864,000 in the third quarter of last year. The net realized loss on investments reported during the quarter included $13.1 million of other-than-temporary impairments and $5.1 million resulting from the sale of securities.

The impairments we recorded as other-than-temporary during the quarter included $8.1 million of perpetual preferred stock issued by several European banks and $5 million of senior debt issued by Lehman Brothers. In order to reduce some of our exposure to holdings in financial institutions, we sold $207.3 million of corporate bonds and cash equivalents issued by financial institutions, resulting in realized losses of $4.2 million. We also sold our entire holding of a perpetual preferred stock issued by Fannie Mae with a par value of $1 million and realized a loss of approximately $880,000.

Overall net premiums earned were $280.7 million in the quarter, a decrease of $9.6 million or 3.3% from the third quarter of last year.

Looking at the segments, net premiums earned in the Property and Marine segment were $151.8 million, an increase of $23.4 million or 18.2% from the third quarter of last year. This increase was primarily attributable to the increase in premiums in North American crop and excess catastrophe business as well as reinstating premiums of approximately $13.3 million related to major catastrophes.

Net premiums earned in the Casualty segment were $124.3 million, a decrease of $29.6 million or 19.2% from the third quarter of last year. This decrease was the result of less business being underwritten due to softening market conditions in most Casualty lines.

Net premiums earned in the Finite Risk segment were $4.6 million, a decrease of $3.3 million from the third quarter of last year, reflecting the reduced demand for Finite business.

Our overall combined ratio was 122.6%, reflecting 50.6 points of major catastrophe losses. This compares with a combined ratio of 81.3% from the third quarter of last year, a quarter in which there was insignificant catastrophe activity.

Net favorable development in the quarter was $32 million as compared with $13.4 million in the third quarter of last year.

Net investment income decreased by $6.2 million or 11.5% from the third quarter of last year to $48 million due to a decrease in yields on invested assets.

Other underwriting and corporate expenses were down approximately 25% from the third quarter of last year, primarily due to the decrease in performance-based compensation accruals and the expiration of the Ren Re agreement. Offsetting these decreases were one-time expenses associated with Topiary Capital Ltd.

Net foreign currency exchange losses for the quarter were $6.1 million compared to net foreign currency exchange gains of $1.4 million in the third quarter of last year.

During the quarter, we held more non-U.S. dollar assets than liabilities. The losses resulted from the U.S. dollar strengthening against the Euro and the British pound during the quarter.

Our effective tax rate for the quarter was 10%, which is approximately 5.6 percentage points higher than the third quarter of last year. This rate fluctuates from period to period as the distribution of income varies by tax jurisdictions.

In the nine months ended September 30, 2008, our book value per share decreased by 1.3% to $33.64 and our shareholder's equity decreased 11.3% to $1.77 billion, reflecting net income, changes in unrealized investment losses, and the impact of share repurchases in the period.

Michael will now offer some commentary on recent underwriting activity, capital management, our investment portfolio, and our outlook on market conditions. Michael?

Michael D. Price

Thank you, Jim. The late season renewals constitute a small portion of our business.

Overall, we had approximately $86 million of premium expiring since mid-July and we wrote approximately $70 million, a 19% decrease. Year-to-date, we had just over $1 billion of premium expiring and we've written approximately $972 million. Thus, we've written approximately 5% less business this year as compared to last year.

The mix of business written has been 56% Property and Marine, 43% Casualty and about 1% Finite Risk.

For reference, there is approximately $35 million of business expiring between now and year end.

In Property and Marine, we had approximately $8 million of business expiring since mid-July and we wrote approximately $6 million. Year-to-date we had approximately $479 million of premium expiring and we've written approximately $547 million, a 14% increase.

We experienced an active Atlantic hurricane season this year, as expected, with three U.S. landfalling hurricanes. Of the three, Hurricane Ike produced the most insured losses. Our estimated Ike losses fall within our risk tolerance for U.S. and Caribbean hurricane events.

Currently our 1 in 250-year net probable maximum catastrophe loss estimate stands at approximately 21% of total capital.

In the Casualty segment we had approximately $78 million of business expiring and we wrote approximately $64 million, an 18% decrease. The reduction reflects the fact that pricing on many renewal treaties fell below our minimum standards.

For the year-to-date, we've written approximately $416 million of premium versus an expiring base of approximately $514 million, a 19% decrease. Greatest reductions have come from Umbrella, Accident and Health, and Financial lines.

We've written no Finite business since January 1 and continue to expect little or no activity in this segment.

During the quarter we repurchased 1,294,100 shares at an average cost of $35.87 for a total of approximately $46 million.

During the quarter we entered into a three-year agreement with Topiary Capital Ltd., a special purpose vehicle that provides us with $200 million of fully collateralized second event catastrophe loss protection.

The global financial system has experienced extreme stress in the recent period. Falling values for all but the safest financial assets have weakened the balance sheets of many insurers and reinsurers. As of September 30, the accounting fair value of our portfolio of invested assets stood at $4.3 billion. The average quality was AA1 and the duration was approximately three years.

Of the total, approximately $2.8 billion or 65% consisted of U.S. government securities, cash equivalents, high quality municipal bonds, U.S. agency debt and RMBS or other sovereign debt  pretty high quality stuff.

The portfolio composition by class is depicted on new exhibits in our financial supplement. Those are Pages 21 and 22, for your review.

During the quarter the unrealized loss position on our portfolio increased to $183 million. Of that, $133 million or 73% can be attributed to three categories - commercial mortgage-backed securities, non-agency residential mortgage-backed securities, and corporate bonds. The CMBS average rating is AAA. The securities have strong subordination and the underlying loans have low loan-to-value ratios.

The RMBS portfolio also has an average rating of AAA. The underlying mortgages cover prime borrowers with low loan-to-value ratios.

Of the corporate securities, most of the unrealized loss is coming from financial names. The average rating on the financial names is AAA3. Detailed by name is provided on the new exhibit in the financial supplement.

We take comfort in the stated intentions and actions so far of the G7 finance ministers and heads of the world's major central banks to provide liquidity and capital support to systemically important financial institutions. Overall we believe our portfolio is conservatively positioned with high quality and ample liquidity.

Our outlook for reinsurance market conditions is cautiously optimistic. At current equity market valuations for insurance and reinsurance companies, accessing new capital would be a very expensive proposition. Since reinsurance is a substitute for equity capital, we expect demand for reinsurance to go up. At the same time, reinsurers may be feeling cautious about their own capital adequacy and therefore reluctant to deploy capacity without getting appropriate rate increases. Therefore, we anticipate improving reinsurance market conditions.

We believe that we're well capitalized, with an acceptable margin above the rating agency targets for a company with our rating. We believe that we have the financial strength required to continue writing a significant multi-class reinsurance portfolio and buying back shares, provided that the business performs as expected.

There is a trade-off between writing business versus buying back shares, and we intend to take a measured approach. We will remain focused on underwriting for profitability, not market share. When buying back shares, we will be value-oriented buyers.

And now we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Josh Shanker - Citigroup.

Josh Shanker - Citigroup

I was curious about a couple things. The first, not that it's impossible, but favorable development has gone up pretty dramatically over the last couple of quarters; I'm wondering if we can go into the vintages and talk about the type of business and how sustainable you think that might be.

And the second, I'm wondering if you can dig into the excess capital comment you just made a little further. How do you get comfortable with your excess capital position, what do you hear from the rating agencies given the capital markets positions and them sort of playing defense. How does that affect your view of that?

Michael D. Price

Well, let's have Neil address the first part of you question, and then I'll come back in and talk about capital adequacy.

Neil J. Schmidt

I'll address what kind of reserve development we've seen to date. I'm not going to get into any projections of sustainability of favorable reserve development.

What we've seen in the current quarter is continued good experience in our Casualty line, particularly in the claims made area, which is somewhat shorter tailed than other lines such as Umbrella. Both our Medical Mal line as well as our non-medical claims made have continued to show less losses than expected, and we can release reserves in the non-medical area basically in the 2003 underwriting year. In the Medical Mal, we have lowered our combined ratios across all of our underwriting years as we did an extensive review this quarter of that line of business.

We continue also to see favorable experience in our Property Risk area and also in our Catastrophe, both the Major Catastrophe - we released some reserves on Katrina, Rita, Wilma  as well as the Attritional Catastrophe area, where we continue to see less catastrophe activity than we had anticipated in those reserves.

So that would be basically encompassing most of that $32 million that we saw in the current quarter.

Josh Shanker - Citigroup

And you mentioned a comprehensive third quarter review that caused you to change picks. How did that compare with what you saw in the second quarter?

Neil J. Schmidt

That was just on Medical Malpractice. That was one particular line.

Josh Shanker - Citigroup

Oh, okay. Very good. Okay, and the excess capital question?

Michael D. Price

Sure, Josh. We try to run the business with a cushion of capital above the rating agency targets that we have. And we do that because unexpected events can occur and we don’t want to be rushing back to the capital markets for minor events.

The question is, you know, what's the right level of capital cushion to carry? And that is, I would suggest, a judgment that has to be made by each management team. We have a methodology for determining the capital cushion that we're comfortable with and, to date, when we have capital above and beyond that comfortable level of cushion, we've been deploying it through share buyback. We would intend to continue with that approach.

When we think about threats that exist, that could erode that cushion, you want to think about things like earthquake events. We're coming into a European winter storm season soon. We've seen that changes in interest rates and widening of spreads can have a material impact on company's balance sheets. We have just had some significant cat losses and early estimates are not always correct, so you want to be careful to be cognizant that those reserve levels can change.

And the capital models themselves can change. You know, each of the agencies has embedded within their model risk factors associated with the asset side of the balance sheet and we don't know whether they're going to look back with hindsight and conclude that those factors need to be adjusted. But we want to recognize that in the past, they have changed capital requirements in response to dislocating events. Just think back to Katrina, Rita, Wilma for the most recent example. So we need to be careful to recognize that the required capital itself can change over time.

So you put all those things together and you say, well, those are a lot of threats and you want to keep a reasonably sized cushion. By the same token, there's opportunity. The opportunity comes in two forms. One, I think reinsurance rates are going to go up. I also think primary rates are eventually going to go up. There's also the fact that reinsurance companies, ours included, are trading at a discount to book value. We're obviously confident in our book value and see the opportunity to buyback shares at a steep discount as being very enticing.

So we have to balance a number of factors - the opportunity against the threats and the opportunity comes in two flavors, writing business at higher rates or buying back shares. So as we tried to suggest in our press release and our early remarks today, we're going to take a measured approach, a balanced approach.

Obviously, writing reinsurance business is why we exist as a company. By the same token, our real objective is to increase book value per share over time for the benefit of our shareholders, and at times like this that can be achieved through buyback perhaps even more easily than it can be through writing reinsurance business.

Josh Shanker - Citigroup

And do you have an opinion as to which of the rating agency models judges you the most harshly and which judges you the most liberally?

Michael D. Price

In general or on assets, Josh?

Josh Shanker - Citigroup

In general, when you're trying to create the rating agency models for yourself and you come up with your excess capital cushion, which rating agency do you think is the one that's most difficult for you guys to appease and which one is the easiest for you to appease, I guess, is what I'm looking for.

Michael D. Price

Sure. For us, and it will vary by company, as implied by your question, based on the composition of the business that they write and the reserves that they carry, but for us, we find meeting the A.M. Best capital requirements to be somewhat more stringent than meeting the S&P capital requirements. And that has to do with the level of cat P&L that we carry.

I will extend the answer to the question on assets. I feel as though the S&P model has a heavier charge for investment risk currently than the A.M. Best model does.

Operator

Your next question comes from Ian Gutterman - Adage Capital.

Ian Gutterman - Adage Capital

Hi, Michael. You addressed my question a bit in your opening remarks, but I was hoping you could expand a bit on it. I'm trying to think how you look at your cost of capital for the renewals coming up this year versus a year ago. And as you suggested, a number of your clients, either due to rating agency pressure on one hand or on the other, opportunistically looking to make acquisitions of cheap assets, it would seem to be that by far the cheapest cost of capital available to them is reinsurance.

And obviously with retentions being much higher than normal, they're showing a capacity for these companies to want to buy more. And it would seem to me that if we're charging somewhere around 12% to 15% return right now, taking it up to maybe 15% to 18% would still be incredibly attractive to them.

So I guess, again, when you're doing your planning, is 15% to 18% enough or do you really need to be getting returns over 20% so that your primaries just don't give you every piece of business that maybe is on the margin and you shouldn't consider taking because they're trying to free up capital for other purposes?

Michael D. Price

Ian, I think you've articulated the trade-off very well. When your own stock is trading at a deep discount to book, your implied cost of capital is very high. I don't think it's possible for a business in the reinsurance marketplace to produce the level of return that's required to make you indifferent between writing that business and buying back shares.

Nevertheless, it's impossible to predict the future stock price, and this isn't a game that you play for just a moment in time. This is a business that you run for the long haul. So you have to be thoughtful about how much capacity you're planning to deploy into the marketplace.

Our cost of capital is higher today than it was last year, to provide the direct answer to your question, therefore we're going to be expecting more from our clients than we were expecting last year. That could result in us writing less business next year than we did this year, even though the profitability of that business could be higher. Our intention would be to take that excess and deploy it into share buyback because we see that as a very attractive way to grow the book value of the company over time.

Now if valuations rebound and companies start trading at a premium to book value again, the calculus changes, and people would probably have more of a bias toward writing business at that point.

So all of these things, again, are why we call for a measured approach to it. We're not a hedge fund that can simply trade out of its positions in a short period of time and reposition itself very, very quickly. Things move slowly in a reinsurance company. We're writing illiquid, usually annual contracts and our best alternative to writing the business is buying back shares, but the opportunity to buyback shares is a function of the stock price in the moment and that, as you've seen, is quite volatile and we can't count on always being able to buyback at a discount.

Ian Gutterman - Adage Capital

And to that point, Michael, I mean, normally, when we think of a market hardening, property comes before casualty, but I guess given that casualty returns are probably lower in the market today than property to begin with and that, too, casualty's more dependent on investment returns were investment risk has gone up, do you think we might see casualty lead this time?

Michael D. Price

I do not. I agree with your assessment that property generally turns sooner, casualty lags, that property returns are higher than casualty returns. All of that is correct, but it doesn't lead me to believe that casualty will turn first. I think property will turn first. It will turn at January 1. And casualty will take some time to catch up.

We would expect to write less casualty business next year in light of that assessment. It's going to take awhile for the people that underwrite that class of business to effect the appropriate rate changes that are necessary to make that look like an attractive class on an overall basis.

Ian Gutterman - Adage Capital

Do you have, as far as when you're thinking of the mix of your book, do you have enough capacity to continue to tilt the mix towards property, if that's the case, that property is much more attractive at 1/1?

Michael D. Price

Well, it's a great question, and it comes back again to this comfort level with your capital adequacy.

Writing more property business necessarily entails taking on more cat risk. Cat risk attracts high capital charges. Higher capital charges mean less capacity for share buyback. So it comes down to a choice that one has to make between returning capital to shareholders at a time when they very obviously want it back versus expanding your own portfolio of business in the face of improving market conditions.

So it's a trade-off we face; everybody faces this same trade-off. I expect most people will choose to write the business, and we will probably, as I suggest, take a more measured approach, which means continuing to buyback shares but also continuing to write a significant portfolio of reinsurance business.

Operator

Your next question comes from Jay Cohen - Merrill Lynch.

Jay Cohen - Merrill Lynch

With the rating agencies, when they communicate with you, what are they saying about unrealized losses, how they're treating those?

Michael D. Price

Well, the models that the rating agencies deploy I think automatically account for unrealized losses because the models apply to your income statement and your balance sheet. And your balance sheet reflects the market value of your securities. Whether they run through your income statement or not, they are nevertheless carried at fair value on the balance sheet. So when you have an increase in your unrealized loss position, you're automatically suffering a decrease in your equity and that will reduce your capital adequacy as measured by these rating agency models.

So they're thinking in terms of fair value. They always have. I think it's appropriate that they continue to do so. So they don't distinguish between realized and unrealized losses, as far as I know.

Jay Cohen - Merrill Lynch

Second question, with Ike, I guess you guys had mentioned that it was very much within your tolerances and within your expectations. Do you get a sense that some of your ceding clients are finding Ike to be a surprising event? In other words, does that storm suggest any weaknesses in their models that they need to change, the way Katrina did, for example?

Michael D. Price

We've seen a lot of disparity in views on this particular event. We have some clients who have expressed the view that this is not an event that's going to pierce their reinsurance retentions nor did they expect it to pierce their reinsurance retentions, and so it's very much within their plan. Other companies have suggested that the losses are much higher than they anticipated. So each event has its own idiosyncratic characteristics, and no model is going to perfectly describe any one event.

We have a situation where this was a large storm. It was a Category 2, but wind speeds at the high end of Category 2, and it pushed deep inland. And so you have losses in inland states that probably people were not anticipating.

The modeling firms differ in the extent to which they anticipate losses in non-coastal areas. One of the modeling firms has a tendency, in our view, to overestimate losses on the coast and underestimate losses inland. The other modeling firm has a healthy attribution for inland losses. So to the extent that companies were focused on just one of those two models, yes, you could have a situation where you get surprised by an event that produces significant non-coastal losses.

Jay Cohen - Merrill Lynch

And then the last question, you had mentioned, obviously, you expect property prices to firm up 1/1, and I know not a lot of business is being done now and the discussions relative to 1/1 are very early in their stage. Are you seeing anything in the market that would support a hardening of reinsurance rates, just even discussions with clients or brokers?

Michael D. Price

I think that the brokers have a realization that things are going to change at 1/1, and those discussions have begun to take place. This was not a situation where everybody is going to instantaneously recognize that rates must go up like you had in '05, where it's a loss bigger than anyone anticipated, but from the kind of event that people attribute to causing hardening of markets.

In this situation, we have significant investment losses, and a lot of people in our business are not really mentally tuned in to the impact on investment losses or resulting from investment losses. So I think you need a process where people assemble their Q3 results, take a look at the change in surplus that has occurred versus last year end, think about their capital requirements per the rating agencies, recognize that there's a fear factor associated in some cases with the quality of assets on the balance sheet, and then that message begins to percolate through the organization and then out to clients and brokers.

Once the brokers pick up on the fact that reinsurers are feeling like they need to get more money, they're going to want to give the heads up to their clients. They don't want to get caught with a situation where they're misguiding clients.

So the message has begun to get out. It has to get out. There's enough time between now and 1/1 for it to be fully realized in the marketplace. And I expect this process of releasing third quarter results and having these kinds of dialogues on conference calls to be a major contributor and framer of the debate.

Operator

Your next question comes from Larry Greenberg - Langen McAlenney.

Larry Greenberg - Langen McAlenney

Michael, you hit on most of my questions, but just one follow on - and I think you had said earlier that you expected some firming on the primary side as well, but can you envision a scenario where reinsurance demand and reinsurance prices increase without any firming on the primary side?

Michael D. Price

That's what we expect to happen at first, Larry. This is going to be, in our view, a reinsurance led hardening of the market.

Operator

(Operator Instructions) Your next question comes from Matthew Heimermann - J.P. Morgan.

Matthew Heimermann - J.P. Morgan

Michael, could you just talk about maybe what factors you see as the greatest risk to getting improvement in pricing?

Michael D. Price

Sure. Insensitivity to valuations of company's stock prices would be a significant risk. If people think that yeah, you're trading at a discount to book but that doesn't represent an opportunity to buyback shares, that's a threat to our thesis. If people see improving market conditions as a rationale to go for broke, that would be a threat to the thesis. If you had a sudden turnaround in credit markets and unrealized losses swiftly transitioned into unrealized gains, that would improve the strength of the balance sheets and that would be a threat to the scenario that I described.

So if people have a business as usual mentality, it's not going to change. If people wake up to the reality that we're in an uncertain and volatile world and the cost of risk is rising, then you'll see the changes that we described.

Matthew Heimermann - J.P. Morgan

And then can you just remind me how much of the business that you'll be - presuming most of those, well, at least the last one, the investment one, which is probably the least forecastable, I guess - well, I guess the question I have is how much of your business is going to renew in the first four months of next year, because if credit markets turn, you know, maybe it's mid-year or late year. So how much business could you lock in before that risk maybe becomes more apparent?

Michael D. Price

It varies by category of business. The Casualty business is a year 'round business. And although January 1 is important, it's not the be all and the end all. Having said that, as we mentioned earlier, we don't think that line of business is going to be the first one to turn, so we can afford to take a cautious and wait and see approach on Casualty.

North American Property business does have a heavy 1/1 focus, but it's not an exclusive 1/1 focus. International cat business is almost exclusively 1/1; you've got some Asian renewals in April, but during those first four months you're writing substantially all of your business.

So the real emphasis is on international cat at 1/1, because that's the whole game. In North America, you can to some extent take a wait and see approach. If you don't like what you see at 1/1, you can make it up later in the year. And with Casualty, it's a year 'round activity.

Matthew Heimermann - J.P. Morgan

The last question I had was for Neil, I guess. It looked like, and I may be reading too much into this, but it looked like the casualty loss ratio popped a little bit this quarter relative to what we've seen so far this year, and I was just wondering if there was any color there that you could provide?

Neil J. Schmidt

Sure. In general, underwriting years '08 are higher as far as the combined ratio goes than '07, which is higher than '06. So you see a natural kind of movement up in Casualty, as well as during the quarter we have boosted reserves on a residual value contract that we had written. A number of those automobiles came off of lease in the quarter, and we boosted reserves by approximately $10 million in the quarter on that contract.

Matthew Heimermann - J.P. Morgan

And that was all current year adjustment?

Neil J. Schmidt

Yes. We account for that when the cars come off lease.

Operator

At this time there are no further questions in the queue. Michael Price, I'd like to turn the conference back over to you for any additional closing remarks.

Michael D. Price

Thank you, Operator, and thank you all for your participation. We look forward to speaking with you again next quarter.

Operator

And this does conclude today's conference. We thank you for your participation. Have a wonderful day.

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