Donegal Group Inc. Q3 2008 Earnings Call Transcript

Oct.22.08 | About: Donegal Group, (DGICA)

Donegal Group Inc. (NASDAQ:DGICA)

Q3 2008 Earnings Call

October 22, 2008 11:00 am ET


Donald H. Nikolaus – President and Chief Executive Officer

Jeffrey D. Miller – Chief Financial Officer


Joseph Demarino – Piper Jaffray

Michael Phillips – Stifel Nicolaus

Daniel Farrell – Fox-Pitt Kelton

Gerard Heffernan – Lord Abbett & Company


(Operator Instructions). At this time I would like to welcome everyone to the Q3 2008 Donegal Group earnings conference call. (Operator Instructions). Mr. Miller you may begin your call.

Jeffrey D. Miller

Good morning and welcome to the Donegal Group earnings release conference call for the third quarter ended September 30, 2008. I am Jeff Miller, Senior Vice President and Chief Financial Officer, and I will begin the conference call by discussing financial highlights and providing commentary on the quarterly financial results. I will then turn the call over to Don Nikolaus, President and Chief Executive Officer, for his comments on our quarterly results and perspective on current trends in development.

Certain statements made in our earnings release and in this conference call are forward-looking in nature and involve a number of risks and uncertainties. Please refer to our earnings release for more information about forward-looking statements.

Our press release issued this morning reported that net income for the third quarter of 2008 was $7.2 million or $0.29 per share of Class A common stock on a diluted basis compared to $11.2 million or $0.45 per share of Class A common stock on a diluted basis for the third quarter of 2007. Our third quarter 2008 net income included $2.8 million of net realized investment losses which accounted for $0.07 per share of Class A stock after tax so that our earnings per share, exclusive of the realized losses, were commonly referred to as operating earnings were $0.36 per share of our Class A stock.

While we are always disappointed about events that negatively impact earnings, the relatively limited impact of investment losses to our current quarterly results is a testament to our conservative investment philosophy. I will discuss the investment losses and our current investment strategy in more detail in a few minutes.

Our total revenue for the third quarter of 2008 increased 8.5% to $92.7 million driven primarily by 13.6% growth in net premiums earned to $88.2 million. Our net premium writings increased 15.3% for the third quarter of 2008 with personal lines writings increasing 15.2% and commercial lines writings increasing 15.6%.

The increases were primarily the result of a pooling change effective March 1, 2008, and as we discussed in the first two quarters of 2008, we also benefited from lower reinsurance rates largely due to an increase in our per loss retention from $400,000 to $600,000. Removing the impact of the pooling increase and reinsurance savings, our direct writings for the quarter increased 3.8% split fairly evenly between personal lines and commercial lines writings.

Our investment income for the quarter was virtually unchanged from the prior year quarter at $5.8 million. There were a number of factors that explained the slowdown in the growth of our investment income. One factor was the use of short-term investments to pay off $15.5 million of trust preferred subordinated debentures in August with the related decrease in investment income more than offset by interest expense savings.

Another factor was our decision to increase our short-term investment holdings and shift them into U.S. Treasury securities during the quarter investing in a combination of U.S. Treasury money market funds and T-bills.

We have chosen to follow a very conservative path until the market stabilized. We reduced our preferred stockholdings from $8 million to $2.5 million and significantly reduced our common stockholdings as of September 30th. As of the end of September we had less than 2% of our investment portfolio in equity securities.

I will spend just a few minutes discussing our realized investment losses during the quarter. Before I do that let me say that we believe $0.07 of realized losses, representing only about half a percentage point of our book value, appears quite modest in comparison to the adverse market impact announced by many of our peers. Having said that, we did incur $2.8 million in pre-tax realized losses during the quarter and I'll give you some details of where those losses were generated.

The sale of a large portion of our equity securities during the quarter, including all of our holdings in Fannie Mae and Freddy Mac preferred stocks in late July and early August, resulted in realized gains of $1.1 million. We sold a portion of our agency debt as a defensive move prior to the government takeover of Fannie and Freddy resulting in a realized loss of around $300,000.

We recorded losses of $1.1 million on equity securities held and managed in a limited investment partnership that we marked as fair value and we recorded other than temporary impairment charges of about $300,000 on a handful of equity securities that we continue to hold. Let me give you some additional information and detail on the investment portfolio and activity during the quarter.

Moving to underwriting results, our third quarter 2008 loss ratio was 60.4% compared to 52.8% that we've reported for the third quarter of 2007. To put the current quarter in an appropriate context, I need to point out that we posted an exceptionally low loss ratio for the third quarter of 2007 when we enjoyed an absence of severe weather events and relatively low levels of claim severity.

Also our third quarter of 2008 loss ratio compares favorable to the ratios posted for the first two quarters of 2008 when severe weather events had a larger impact. However, compared to the third quarter of 2007, we did experience an increase in weather related losses, primarily as a result of the remnants of Hurricane Ike that generated wind claims in Ohio and western Pennsylvania.

Also contributing to the higher loss ratio year-over-year was slightly less favorable loss reserve development as compared to the third quarter of 2007. As we analyzed the development data, we were pleased to see our prior accident year reserve development improve from the second quarter when our development was basically flat to approximately $1.1 million favorable development for the third quarter of 2008.

Our expense ratio was 33% for the third quarter of 2008 compared to 35% for the third quarter of 2007. This ratio was in line with the first half of the year and with the decrease again attributable to a higher premium base and lower underwriting base incentive costs due to the less favorable underwriting results year-over-year.

Our combined ratio for the third quarter of 2008 was 93.8% compared to the very favorable 88.3% posted in the third quarter of 2007 with the increase directly reflecting the higher loss ratio in the current quarter. Our 93.8% combined ratio in the current quarter should compare very favorably to the industry composite combined ratio and represents a significant improvement over our results for the first half of the year.

Our net income for the nine months ended September 30, 2008 was $20.8 million down from net income of $27.5 million for the first nine months of 2007. Earnings per share for the first nine months of 2008 were $0.83 per share of Class A common stock on a diluted basis compared to $1.10 for the first nine months of 2007, and our combined ratio for the nine month period in 2008 was 95.9% compared to 91.5% for the year earlier period.

Our pre-FAS 115 book value per share as of September 30, 2008 was $14.24 reflecting a 6% increase over the $13.43 pre-FAS 115 book value one year earlier.

Our Board of Directors declared dividends of ten and a half cents per share of our Class A common stock and nine and a quarter cents per share of our Class B common stock payable November 17 to stockholders of record as of the close of business on November 3rd.

As I conclude my comments, I am pleased to be able to say the Donegal Group continues to operate from a position of financial strength and were are continuing to manage both the investment and underwriting segments of our business in the conservative manner that you would expect of us based upon our historical reputation and results.

At this point I will turn the call over to our President Don Nikolaus for his comments on the quarter.

Don H. Nikolaus

Thank you, Jeff and good morning everyone. Welcome to our third quarter earnings call. Jeff has given you a very detailed overview of our earnings as well as details as it relates to our investment portfolio and I will not be repetitive as to that. However, with regard to our earnings we were quite pleased given all of what is going on in the financial market, and in our own industry, that our operating earnings per share were $0.36 per share and that the impact of the investment write-downs and realized losses were contained to $0.07 per share.

We are also pleased that in addition to the fact that because of the pooling agreement, we had a 15% increase in net premiums written, that organic growth was actually 3.8% and we are pleased with that. We are necessarily not satisfied with it but relative to the marketplace we think that that's a relatively good number.

With regard to the Hurricane Ike event, certainly Jeff has told you the financial impact of it. It was certainly quite unusual for the remnants of a Hurricane to find its way into the State of Ohio and western PA. Needless to say it did hit other states in which we do not do business.

But what I think it points out is that although that did occur and it’s a substantial event for many carriers, I think that we were fortunate because of our book of business in those particular parts of those states that it was contained, and also that our reinsurance that is in place both internally and externally responded to that particular type of loss.

Just a few comments about the financial markets and the Donegal portfolio. I would like to also emphasize that we believe that our portfolio is well positioned. Needless to say in the months of August, September and October we have certainly been focused on making sure that we are well positioned and it's appropriately being managed. As you can see from the statistics that Jeff quoted, we elected to reduce our equity exposures and to have a very strong liquidity that we chose to invest in treasuries.

If you may remember in the two prior quarterly calls, I had made reference to an emphasis on balance sheet strength and certainly in the third quarter with all that is going on in the financial marketplace, that it's certainly been emphasized that strong capitalization and balance sheet strength are essential in these kind of times in which we are living.

I think we all recognize that the travail in the financial markets are reflecting the deleveraging by major financial institutions of their balance sheets and that risk and the tolerance for risk will in our judgment change materially. We think that this will impact the insurance cycle and the change in the tolerance for risk.

I think there will be far lower tolerance for risk in financial institutions and we are certainly a form of a financial institution. We think that this could have an impact on the insurance cycle and potentially hasten the end of the soft cycle.

More income for companies will need to be generated from underwriting income and I think that this underscores what we have had for some time as our philosophy, that underwriting income needs to be very much a focus because at the end of the day that is the primary source of how an insurance company generates its income, and investment income is certainly a major element. But without underwriting income investment income is not going to carry the day.

Having said all of that about the cycle, we continue to see at least at this point in time that the marketplace continues to be quite competitive, although we do see a significant number of carriers that have a presence in the personal lines space to be increasing rates.

As we had previously announced that in the end of the second quarter, when we had our call in July that we indicated at that point in time we had made ten personal lines rate filings for various products and in various states. We have made several since then and we are currently reviewing all states, all lines for potential additional rate action.

We are pleased to tell you that we have a continued focus on growing our distribution system. In the third quarter we appointed 56 new agencies that bring the total to 194 for the year. We continue with somewhat referred to [Royer].

We continue to focus very much on premium and rate adequacy and discipline in underwriting. If anything we are looking at our underwriting requirements and our underwriting discipline to see whether there's any further strengthening of what is already we believe is a disciplined approach.

Our thinking is that this is a time to be building for the future both to building for the distribution system, but also positioning ourselves to be able to be opportunistic. We think that companies that are well capitalized, that are not damaged by any of what is going on, or not damaged in any material way that those companies, and we want Donegal to be among them, will have opportunities to grow their market share.

And certainly we need to be in a position to respond to a potentially softening economy including strict expense control which we are in the process of doing a very thorough review.

In the acquisitions arena, we are pleased to report that we are making good progress on the Sheboygan Falls Mutual Insurance Company de-mutualization. That it is at its completion. The public company would be acquiring that from Donegal Mutual Insurance Company.

We continue to reach out and to participate in discussion of other acquisition opportunities and we continue to believe that those opportunities will expand going forward. At this point I’ll turn it back to Jeff and we will do the usual Q&A.

Jeffrey D. Miller

All right thank you, Don. Operator if you would open the line for questions please.

Question-and-Answer Session


(Operator Instructions). Your first question comes from Joseph Demarino – Piper Jaffray.

Joseph Demarino – Piper Jaffray

So it sounds like you had organic net premium growth of 3.8%.

Jeffrey D. Miller


Joseph Demarino – Piper Jaffray

Excluding the re-insurance and [pooling] arrangements. What did you attribute the growth to? Pretty – we thought it was pretty good relative to some of your peers who have reported so, how have you been able to increase top line here.

Don Nikolaus

Well I think that it is nothing new that we did in the third quarter. I think that it is a combination of things as we have said in prior earnings calls that we have had a significant focus on rolling out all of our technology to our various states.

We have seen an enhanced use of that technology over time. We think that’s been helpful. We also took some rate increases in some personal lines in a few states. We have certainly stepped up our sales in our marketing effort and also we have indicated we have appointed 194 agencies.

And early in the year, the first two quarters, we appointed over 135 agencies and we have seen that over time that new agencies can be a great source of new premiums. So I think it’s a combination of things, Joe.

Joseph Demarino – Piper Jaffray

Okay, that’s helpful. So what of the $7.5 million what’s – how did that break out between the [pooling] arrangement and the increased retention?

Jeffrey D. Miller

The 7.5 million is actually the pooling change itself. And then we would’ve saved another $2.4 million in re-insurance savings from the increased retention and lower rates and then the balance would be organic growth.

Joseph Demarino – Piper Jaffray

And going forward how should we think about future impact from the change in the pooling arrangement. What’s the best way to incorporate that into indirect thoughts here?

Jeffrey D. Miller

We would expect similar impact in the fourth quarter as what we’ve seen in the first, well actually the third quarter and the second quarter which was between $7.5 to $8 million. Generally, the writings are a little bit slower in the fourth quarter just because of the way that the timing of our writing bids so I would expect it to be somewhere in the $7 to $7.5 million range as far as the fourth quarter impact.

And then in the first quarter 2009 we’ll have two months of impact there as well.

Joseph Demarino – Piper Jaffray

And, then, for the favorable development I think $1.1 you had, $1.1 million in the quarter?

Jeffrey D. Miller

That is correct.

Joseph Demarino – Piper Jaffray

Do you have a break out of that by accident year or by line, or both?

Jeffrey D. Miller

I do have some details. The majority of that would have come from the 2006 to 2003, 2003 to 2006 accident years. 2007 has improved, although it’s still not showing favorable development, so and that’s typical of the most recent accident year would take some longer time to develop favorably.

But it’s fairly evenly split between the years 2003 through 2006. As far as lines of business, workers comp, it is commercial multi peril as well as the personal and auto liability, generally it’s the casualty line where you would see the majority of the reserves and therefore the majority of the favorable developments.

Joseph Demarino – Piper Jaffray

Thanks, and one last question. On the, some of the rates, rate filing increases that you’ve seen, I guess most of those have been in personal side; any indication of firming or hardening of rates in commercial business?

Don Nikolaus

I can’t say that we’ve have seen any firming of commercial rates at this point but we also can say we don’t think it’s gotten any more intense either. It sort of plateaued.


Your next question comes from the line of Michael Phillips – Stifel Nicolaus.

Michael Phillips – Stifel Nicolaus

First question is kind of a two-parter, just two lines specific questions. Can you talk about what you’re seeing for worker's comp in terms of loss costs and rates there for worker's comp and then secondly on homeowner's what you’ve done in terms of activity specifically in? homeowners.

Don Nikolaus

All right well in worker's comp we are seeing that the comp rating bureaus of some states has actually reduced loss cost. What we have tried to do and this is regulatory permissible, we have tried to soften that by raising our loss cost multipliers because every company has to establish its loss cost multipliers that you then apply to the loss cost developed by the rating bureaus.

And we have, in most states, we have multiple work comp programs, one being – having different underwriting criteria; different size premiums and maybe a little more competitive than one of the other offerings that we have. So we’ve tried to deal with it in that way.

In the homeowner's arena, we have, referring back to my discussions about rate filings, we have made a number of homeowner rate increase filings and would anticipate having a number of additional ones.

Because if you look at the weather events that occurred in the first quarter, second quarter and now third quarter and now they have, they have their impact on primarily property type of coverages and homeowner's is one of the big ones. So we think that they're within reason. We think that there will be the opportunity to take some reign.

Michael Phillips – Stifel Nicolaus

I guess on homeowner's even if you back out the caps, if we looked at industry data even on a state by state basis, you know, Pennsylvania, Maryland, Virginia, some of the larger states we’re seeing trends that are you know near double digits and 10, 11, 12% maybe around that area for homeowners loss cost, again excluding cap.

So you know there was kind of concern that rates need to pick up but kind of the question the magnitude of that so hopefully we're keeping pace with that, with that trend we’re seeing. Maybe you’re not seeing in your book but overall that’s kind of what we’re seeing. I don't know if you have any different views on that.

Don Nikolaus

Actually in some of the states that you mentioned we are not necessarily seeing that but we are seeing it in states like that were more weather impacted, states like Ohio, Georgia, Tennessee, and a little bit in North Carolina. But we are reviewing all of the states because needless to say you have to have premiums to be able to respond to even a cat event so we’re reviewing them all and making sure that going forward we want to retain it as a quite profitable line of business. It has been over the last three to four plus years and we want to have it be a profitable category.

Michael Phillips – Stifel Nicolaus

Question on your agency appointment and I know this comes up a lot, I’m not going to ask about when you think you’ll see kind of a moving of the needle for your new agency appointments. I think that gets asked quite a bit.

But what I am curious about is kind of just a nature of the agency you appoint in terms of location, size, producers they have, other carriers on their sheets. Are they small rural guys, with one or two other carriers, or are they more suburban, with maybe three, four, five, or six or that kind of thing, just kind of an overall kind of characteristic of the agencies?

Don Nikolaus

Sure, candidly it would vary from state to state. There would certainly be in some

of the states, there would be; they're rural agents. They would be small town and small city agencies. But in some of the markets in Virginia, Pennsylvania, Georgia, some of those market places there would be larger agencies that are both, have a footprint in commercial and personal lines.

They all would certainly – would have other carriers. It is certainly a time when because there’s a soft market that you have to make sure in agency appointments that there is a good reason for you to make that appointment.

And we require three year loss ratios from all of the other carriers in an agency because we want to make sure that we’re not making an agency appointment where there are loss ratio issues. And that that’s reason an agency is willing to be appointed.

So we have not let up on the vetting process of how we get agents and how they qualify. But depending upon the state you could have a small mom and pop agency to appointing an agency that’s a $10 million or $20 million agency.

Michael Phillips – Stifel Nicolaus

The deal you did a bit ago on the Conestoga Title I thought that was unique and just curious what why and what your plans are with that?

Donald Nikolaus

Well so that we’re clear, that’s owned by Donegal Mutual Insurance Company.

Michael Phillips – Stifel Nicolaus

Yes I understand.

Don Nikolaus

And public company has no involvement in it. Well, some years ago, going back 8, 10 years ago we had discussions with the owners of Conestoga. It’s a part of the insurance arena that as a company we have had some interest over time. And this opportunity presented itself and we think that we can make it a profitable part of our next of business, but as I said at this point in time the public company doesn’t have any involvement in it.

As you know the title industry is clearly affected by the housing market and has a down cycle. We felt that was an opportunistic time to enter into that business because it would be an opportunity to understand it and build on it and certainly at a time when the pricing as a buyer coming in would be rational.


Your next question is from Dan Farrell – Fox-Pitt Kelton.

Daniel Farrell – Fox-Pitt Kelton

Couple of quick numbers questions, I just want to make sure I got a few of these squared away. The 3.8% organic growth, do you have any breakout on that, exposure versus rate?

Jeffrey D. Miller

That I do not have at my fingertips, although the majority of that is going to be exposure related Some of the personal lines increase would be rate related, but most of that hasn’t really baked its way into the system yet.

Daniel Farrell – Fox-Pitt Kelton

And then on the loss ratio, another numbers questions, and it’s my last numbers question I promise. But it’s the 52.8versus 60.4, the year-over-year change in loss ratio. A couple of different pieces baked into there, right it’s, year-over-year you had less favorable development I think you said and then also you had larger cat losses. I guess you just called it – you just said wind losses.

But do you have if I basically trying to understand the year-over-year impact in loss trend and pricing trend. In other words basically are active in quarter non-cat loss ratio, do you have that or can you at least give us a little bit of color around how you view the year-over-year change just from lost trend and pricing trend?

Jeffrey D. Miller

I can give you some indications there as to where the difference in loss is. And I guess I looked at it a little bit differently. I was looking at it on a pure dollar basis as to what was the cause of the increase in the losses from September third quarter 2007 versus the third quarter of 2008.

There’s a number of things that impact that. There’s of course we mentioned the development in the third quarter of 2007, we had favorable development that exceeded the favorable development in the third quarter by about $1.7 million.

Storm losses of course in the third quarter of 2008 were higher, somewhere in the $1.5 million range. The pooling change of course is adding to the dollars not to the, not necessarily to the ratio, but and then just non-weather related losses.

We did receive some modest uptakes in severity in some of the lines compared to last third quarter when, as I said before, we had a very favorable quarter from a loss experience standpoint.

So we would have experienced some fires in some of our regions that caused some of the severity to go up, as well as some of the liability lines where we saw some modest severity upticks. But I think that’s the – would be the explanation that I can give you without going into a lot of detail as to the difference in the two quarters.

Daniel Farrell – Fox-Pitt Kelton

Getting away from bogging down in numbers, just the – [Amvest] affirmed the ratings this quarter. And I’m just curious other competitors have not been as fortunate, some well publicized very large carriers but also some smaller carriers and just wondering if you’re seeing that impact the competitive landscape? Either whether you’ve seen that or whether you anticipate that on a go forward?

Donald Nikolaus

Well I think that your question’s a very timely one as those companies that have been impacted by a number of circumstances that may have caused or will cause their ratings to have some deterioration.

Needless to say in the overall scope of things, that should provide opportunities for well-capitalized, well-rated, well-managed companies with a good strategy. And we certainly don’t wish anyone else ill but that certainly we think that there will be business opportunities and one of the things that we are committed to do, just as we did with our portfolio, we want to make sure that we are well positioned to take advantage of those opportunities which we think we will be forthcoming.

Daniel Farrell – Fox-Pitt Kelton

Then last question and somewhat on the same note, as we look at ratings creating opportunities and of course troubles on the balance sheet, which is pretty tied to ratings but not always, but you see a lot of companies that are running into trouble. And what would be your appetite for doing some kind of a transaction with a company that’s run into those kinds of problems, or how do you think about that?

Donald Nikolaus

Well we have never shied away from looking at an acquisition opportunity even if it was a company that had some difficulty. Because of what we are looking for, is whether the fundamentals of a book of business are sound or whether they can be shaped into consistency with what we would like to see.

So we would be certainly open to looking at organizations that may have unfortunately for them have had some difficulties whether it be on the investment side or whether it be on the underwriting side. And I believe that the way we have done acquisitions in the past, we have a seasoned team that know what to look for and also to come up with a plan as to how we’re going to fix it.


Your next question comes from Gerry Heffernan – Lord Abbett & Company.

Gerard Heffernan – Lord Abbett & Company

In regards to the personal lines are you seeing any movement in policy changes, movement to increased deductibles to lower annual payments or the reverse because of people don’t want to be on the hook for a deductible of that size. Do you see the personal auto policy holder making any changes to the way they’re doing business?

Donald Nikolaus

I can say Gerry that we have not seen any of those trends at this point. That isn’t to say that they won’t show up at some point in time, but there are no indications that we have seen of that kind of activity.

Gerard Heffernan – Lord Abbett & Company

In regards to looking at possible rate increases in the personal lines then. What is enabling you to get this through the market? I mean why it's still a very competitive set? Are there that many of your competitors looking to rate increases also?

Don Nikolaus

Well, from what we have seen is that some of the major personal lines carriers have put through – now they're modest increases, they’re not double digits, but they’re increases and we would be looking to do the same and we’re talking about increases anywhere between 4% and 7%. Now that depends upon the line of business; it depends upon the state.

Needless to say that we would not want to be doing that if we were the only carrier out there attempting that. And you also have to be selective. As you know there are rating territories in each state and that if you have actuarial justification you might leave one rating territory alone or a very modest increase in a certain rating territory where you have had some very sweet spots from a profitability standpoint and there can be other territories where you have not had the same experience.

You also have the opportunity of taking a look at your decision trees in the black box underwriting and seeing whether there are opportunities where your actuarial people are hopefully pointing out to you where there are some areas where you either can increase your amount of business in a certain very profitable class or profile of applicant, or where you might need more premium on a certain particular profile of business and that’s all regulatorily permissible providing that you, that you comply with all the filing requirements.

So it’s more than just a historic approach to saying oh, we’re going to have an across the board increase. Much of it you try to find too, so that you maximize your profitability where it’s profitable and you increase your rates where you believe that it’s appropriate. Plus you add in some elements for overall increasing.

Gerard Heffernan – Lord Abbett & Company

Correct me if I am wrong, over the years through cycles, the very large regional or large national payers that you compete against in the commercial side, when things are bad they tend to pull out of some of the smaller rural areas and when things are good and they’ve exhausted their ability to penetrate in their larger markets they then start to push out into your areas. Are you seeing any of this? Am I correct in that thought and are you seeing any of the retraction at this time?

Don Nikolaus

You are correct. That this historically has how it has played out that when things get tougher the larger companies sort of reel in their appetites for smaller geographic areas and also smaller lines of business.

We hope that, that materializes. I don’t know that at this point that we have seen a lot of that. But you’re exactly right. That’s what will happen with many of the large carriers because they don’t have the same consistency, at least generally, that regional companies seem to try to have.

So I think that could develop but we at this point haven’t seen that occurring.

Gerard Heffernan – Lord Abbett & Company

Then on the 800 pound gorilla here what about AIG and any effects that it’s having on the market and since the answer is probably don’t see a whole lot at this point, if you would talk about what you could envision happening one, two years out?

Don Nikolaus:

Well a couple of different aspects of the AIG, first of all, we did not compete in any of the AIG space except where they were writing direct personal auto. Most of their other insurance operations are classes of business that we generally would not compete in.

So we would not have a direct benefit in terms of being able to write business that might be looking for a new home that were AIG business. But it is clear from those that we talk to in the re-insurance industry and just hearing feedback in various insurance publications that there will be, in some markets, there will be a constriction of the capacity because of some of the things that have occurred with regard to AIG.

There are even those that believe, I think one of the large re-insurers, I think Munich came out and said that all of this is going to immediately cause the end of the soft market. So we would agree that all of the AIG will have some collateral effect. It sort of goes back to my comment about the tolerance for risk.

And you can all make your own assessment of what went wrong at AIG, but you could certainly, one of those assessments could be that there was not a full understanding of the risk that was being assumed. And we think that that will ricochet in our industry where enterprise risk management will be much more an area of focus.

I think that rating agencies will want to be assured that there is a strenuous enterprise risk management process in place and the more focus there is on enterprise risk management in an insurance company I think the more there will be a return to a focus on underwriting discipline and recognizing that you have to make strong profits in underwriting. And that I think that will bode well for the cycle and I think it will bode well for regional carriers such as ourselves.

Operator: Your next question comes from Joseph Demarino – Piper Jaffray.

Joseph Demarino – Piper Jaffray

Thanks two follow-ups, two housekeeping items and I apologize if you’ve already covered them. What was your statutory surplus number in the quarter and then did you buy back any shares during the quarter?

Jeffrey D. Miller

Sure Joe, the statutory surplus as of the end of the quarter was $326.1 million. And we did purchase 4,000 shares during the quarter. Obviously that’s a small number of shares but our focus during the quarter was on preservation of capital and we did pay off the trust preferred but that was a usage of capital during the quarter. But 4,000 shares at $18 a share was the number that you’re asking for.


There are no further questions, sir.

Jeffrey D. Miller

Well we want to thank everyone for their participation in the call and for listening in on the webcast and wish everyone a good day.

Don Nikolaus

Thank you everybody.

Operator: Thank you for participating in today’s conference call you may disconnect at this time.

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