Endurance Specialty Holdings' CEO Presents at Bank of America Merrill Lynch Insurance Conference (Transcript)

| About: Endurance Specialty (ENH)

Endurance Specialty Holdings Ltd. (NYSE:ENH)

Bank of America Merrill Lynch Insurance Conference Call

February 13, 2013, 12:35 pm ET


David Cash - President & CEO


Unidentified Analyst

David Cash, CEO, of Endurance Specialty will be our next speaker. David was one of the architects of Endurance. He has been among the senior leadership of this company since its founding. I was reading through David’s bio last night and we have something in common, David was a Rhodes Scholar and I appreciate Rhodes scholars. So David I will turn it over to you.

David Cash

Thank you [Jay], I appreciate it and thank you everyone for being here today. As Jay said, David Cash, CEO of Endurance specialty insurance; I’ve met with a number of you already and I know the ones who have had some pretty detailed conversation around our company, our strategy and what we are doing. Consciously, this presentation is going to be a high level overview of the organization; I'll do my best not to use the full 30 minutes allotment, so we can do questions and answers.

And so with that, here it goes; the inevitable. So just to talk a little bit about insurance specialty; we were formed in 2001 in the aftermath of the World Trade Center event. Based in Bermuda, and we were formed from the very beginning to be an insurance company and a reinsurance company at least initially focused on some of the lines of business most dislocated by the events of 2001. But overtime to become a multi-line insurance and reinsurance company and so I will spend much of today just talking about how that build out has taken place and where that puts us today.

We have a diversified book-of-business and when I call a diversified specialty company if that's not an oxymoron, we write in the underwriting classes of business that tend to be a little more technical, where you are typically, which drives the economics of your business is your ability to differentiate risks from one another. So that's about scale. So we don't tend to compete with the scale players like travelers, we don't compete in the personal lines space. We write complex commercial risks, be they insurance or reinsurance.

We have a large balance sheet. Our business is very much about capital. The risks we take are large. A lot of the risks we take are correlated and so when you look at companies in our space they are very much about, our unit of production is our balance sheet. The bigger our balance sheet is the more risk we can take. We spent a lot of time managing that balance sheet overtime either in terms of managing the risks we run to that balance sheet or the way we would manage capital. And so you've seen some slides later in the exhibit that not only we are about building revenues, building diverse streams of revenues, a lot of its about how you manage capital.

So with that let me just introduce you to the company. So the pie chart on the left gives you a sense of our mix of business and so in our space we are roughly split 50-50 insurance and reinsurance. On the left hand side of the pie shows our insurance operations and the right hand side of the pie shows our reinsurance operations. We came into existence in Bermuda, I would say largely it’s a reinsurance company and so when you look at our reinsurance mix of business roughly a third of our reinsurance book, maybe a little bit more 40% is Bermuda reinsurance that's CAT reinsurance, high sort of volatility business, heavy emphasis on capital management and heavy emphasis on building diversified portfolios of risk.

We've been in that business for 10 years. We do it very well and the last 10 years have been interesting years that we've had, things like Katrina, Rita, Wilma, we've had the various with intense catastrophe activity in 2011 and more recently for those of you in New York we had Hurricane Sandy. So a lot of the economics of our business are driven by events you guys will see in the news.

The second part of our reinsurance pie is what we call North American reinsurance and here we are essentially, we are trading with specialty lines insurers in the US marketplace. There is a little less volatility in this part of our book of business and in some instance the economics of that part of business are driven somewhat by the underwriting cycle and for those of you that are sort of familiar with the U.S. insurance marketplace, what you tend to see overtime, is a fairly pronounced ebb and flow and rate and we had a period of time, over the last, probably over the last 30 years, we had three major pricing peaks in U.S. marketplace; one in 1977, one in something like 1988 and then one more recently about 2002 and 2003. And so if you are reinsurer in that marketplace, your economics are very much driven by that sort of market ebb and flow; less to do with kind of CAT losses.

Then the final portion of our reinsurance business is what I call international operations and we have reinsurance teams in London, Zurich and Singapore. So to give you a sense, the global P&C reinsurance marketplace, roughly 60% of global reinsurance premiums are sourced from outside of North America, outside of Bermuda, outside of let’s say, essentially New York.

If you look at our company, roughly 80% of our revenues come from North America and from the Bermuda market. So one significant strategic aspect of the way we’re managing the business right now is trying to increase the size of our international operations; I’ll spend a bit of time later in terms of what we've done in that area.

Shifting to our insurance book of business, well, there a few things that are going on in our insurance book of business; we started as an insurer, partly in Bermuda, where we wrote a global excess account. This is what I call the ace and excels business; it's higher volatility insurance. You are typically insuring Fortune 1000 companies, kind of core products they buy, the liability insurance for set of bodily injury, property damage. So the kinds of companies you do business with they are manufacturers, product liability exposures, pharmaceutical companies, engineering companies, industrial companies.

High margin business; it's a volatile business. It can also be somewhat correlated. In our Bermuda book of business, we would have been exposed for instance to the financial crisis. We would insure profitable liability accounts and we would insure financial institutions. So we had picked up some losses there back in 2008, 2009. At the same time it's a very profitable business over the cycle and that business has generated profits for us essentially every year since the formation of the company.

So we think about insurance we start with what we call global excess then within two other things to expand their insurance operations. The first I will talk about is our agricultural insurance operation. So a reinsurance company, there is a little bit of aggression, when we set up in North America we built out a number of specialty capabilities, one of those specialty capabilities was agricultural reinsurance. And what we found is overtime the insurance companies in the agricultural space started to consolidate and they started to buy progressively less and less reinsurance and so in that market we’re shifting from being a marketplace for the insurers essentially delivered the product to the customer, but didn’t have a balance sheet to support their underwriting and they bought that capital, rented that capital in the form of reinsurance.

What you have seen overtime is that marketplace is consolidated significantly and a lot of the largest players now are just their large insurance and reinsurance companies that bought companies in that space and so we saw our reinsurance business starting to shrink. So to reinsure, we knew that market well, we thought the underlying economics of business were attractive; we spent quite a bit of time looking at different companies in that space and ultimately bought a company called ARMtech based in Texas. It’s about the time we caught our agricultural insurance footprint and it’s grown significantly overtime; some of that growth is being driven by straight organic growth and some is being driven by changes in commodity prices overtime. So back in 2006-2007 the price of a bushel of corn was about $2 and today the price of a bushel of corn is probably, I am wrong, it’s somewhere between $5 and $7 and so we have seen that book of business grow significantly partly with expanding the number of farmers we do business with and partly with just some economic changes in terms of commodity prices.

Then the last piece of the book of business on the insurance side is what we call U.S. specialty. This is really U.S. excess and surplus lines insurance. We started that business in 2005 and it’s grown frankly less than I would have wanted it to. We have had a few missteps along the way; we are probably more or like a $300 million book of business there a couple of years ago. We will be doing three underwriting in that book of business; it’s shrunk over the last two years. Going forward, I am expecting see that part of our book of business grow.

So here we are, what I call specialty insurance and reinsurance company; we write in the technical class of the business, so the underwriting itself is fairly driven by knowledge of the client, you send up spending a lot of time trying to ensure that you have an underwriting team that’s sort of familiar with the space. It tends to be driven by perception of risk and correlations; you spend a lot of time on risk management and risk modeling and to some extent it’s driven by the kind of the events of the market, either the reinsurance market of the insurance market.

Today, what I would call kind of a changing marketplace, and so the insurance and reinsurance markets over the last few years increased in sort of the period of what we call secular decline; it’s been a fair amount of capital in the marketplace, you seen a steady reduction in the prices charge in those marketplaces to clean U.S. Over the last couple of years sort of hit bottomed, I would say, in many ways when you listen other speakers today, they will be talking about that kind of changing dynamic in the marketplace is there and that's true for us as well.

We are starting to see increases in prices in our insurance book of business. We are starting to see clients come back, you are looking for more opportunistic growth, so originally we’re seeing policy count growth just as a function of really changing prices, and it gives us a sort of a newer younger and trend more opportunities to expand our business. So when you think about out mix of business, 50% reinsurance, 50% insurance. We are in an environment where I am starting to see improvement in pricing and we’re across a lot of different technical lines of business.

Just in terms looking the way our book of business is growing overtime, this shows you our lagging net written premium profile of the company over the last 10 years. The blue portion of this chart shows how our reinsurance business has grown overtime, and you could see when we started the company up, it was a very much reinsurance opportunity for us, so we peaked in terms of size, something like $1.3 billion of premium, net written premium back in 2003-2004 and as the market is slowly sort of shifted in pricing slowly, we've reduced the size of that book-of-business. What has started to change over the last few years is we've started to grow our international operations and I've not broken it out US domestic versus international but essentially over the last three years, we've seen a steady expansion to the amount of business we write internationally and that's visible in the blue portion of the chart.

And the second part of the chart, the green shows our insurance operations have shifted over time. And so, you can see today that we have a mixture of casualty, property and specialty lines particularly agriculture insurance. Those of you know the company will know that agriculture insurance is a big part of the company and I hate to say but sometimes it’s an interesting part of the company. It’s a part of the business where everyday you spend time with farmers in the field, essentially kind of delivering the product to them. It’s really about service and execution. And if you do that well, you will see our policy count progressively grow over time and that's been true for us, our business has been on a steady growth trajectory and smoothly about service.

If you are an investor though, if you look at the agriculture insurance business, it’s all about the weather. And so this business over the last couple of years, we've had a couple of tough kind of periods in terms of weather. 2011 is challenging. We had some pronounced droughts in Texas which caused us to be breakeven for the year and then last year those of you had followed the news will know we had really a once in a kind of 20 to 30 year period drought in the US, a pronounced drought that filed the Midwest region of the US.

It’s probably the most challenging; year people in the crop insurance business have faced ever. So when I look at our own organization, we have a definite skew towards catastrophe lines of business, its visible in our reinsurance business. The last couple of years have been challenging for cat. We have a real pronounced skew towards agriculture insurance to be honest, last couple of years have been challenging years.

And so when I think about our company, we are moving out of a period of time where I think we had sort of exceptional conditions, exceptionally challenging conditions for the organization. We've been able to generate results I think that are acceptable given the challenging nature of the conditions but we are moving into a period of time where I think we are going to see good results and more to the point I think we will see that reflected in our valuation.

So with that, I will spend a little bit time just talking about the different parts of our business. And the insurance side of our business, there are a couple of things that are going on. On the crop side of our business essentially this is status quo. This business we bought it in 2007. It cost us about $100 million to buy that book-of-business. This is the time where valuations are strong. I think the price we paid was very much fair price. This business is something that grows organically; it does not require a lot of capital to support. So to give you a sense, in this business roughly for every dollar premium you hold, you probably need to hold about $0.30 a capital.

So it's capital efficient and then when you think its sort of just operationally expanding the business, it doesn't require a lot of investment essentially we probably spend $2 million to $3 million a year on expanding our IT infrastructure and we think that's necessary in order to remain competitive from a service perspective, but otherwise we add staff as we grow the business.

If we grow in the Midwest, we add claim staff in the Midwest but it’s not something that's very capital intensive for us. It’s really about making sure that you have a good operating model and then it’s about the weather. I'll spend some time in that in a little bit.

Our global excess business, this is the large risk insurance business, large commercial account business, it's been very profitable for us over time. It’s just not as big as I'd like it to be and so we just announced the management reshuffle last year.

We brought in a new individual Jack Kuhn to join us. He was previously with AXIS Capital but before that he was with Chubb. And he was responsible for parts of Chubb’s professional liability business when he was with them and more recently he was the chief Underwriting Officer for AXIS’s global insurance operations.

The global excess business is very much about professional liability products, large risk businesses; it’s about taking risk on complex risks. Jack is going to be very able to grow that business and over the next couple of years you will see us add staff in this area and I would like to see that business grow.

Today, we announced to about $200 million of debt written premium for us. Over the next three to four years, I would expect that to grow to something more like $400 million to $500 million for us, net written premium, historically, the combined ratio on this business, somewhere in the region of the 80% combined ratio business.

So it's a natural place for us to invest. A lot of what we need to do in that space is add talented underwriters and so when I next meet with you, the thing you have to ask me is how are we doing on the recruiting side. We've done very well in terms of leadership. We feel thrilled to have Jack with us but over the next couple of years, you need to add out the underwriting staff to support that business.

The last part of our book-of-business the US specialty, it's been a challenging area for us. We came to the US specialty market a little bit late. Frankly, we targeted lines of business that probably were not the right lines. We targeted a distribution channel that wasn’t the right line. We end up being very (inaudible) embedded in the wholesale channel at a period of time, where the wholesale distribution channel was being restructured.

And so if you really go back five years, that was where you were going through the issues with bid rigging in the broker space. You saw that large retail brokers change their own business model and one of the things they do was they started to pull business back from the wholesale channels. So probably the one mistake that I have to most regret over is our foray into the US specialty insurance marketplace and our heavy emphasis on wholesale distribution.

So we had been reengineering that business over the last couple of years we shrunk it quite significantly with a much greater emphasis now on retail distribution, small retail distribution as opposed to large retail distribution and more of an emphasis on chemical niche products. So the one product that we added most recently, we brought onboard a (inaudible) to our inland marine business, kind of niche business, we are in the process of staffing that business out and it's really about getting access to sort of small retail accounts.

And so, we will be adding people in the field to grow that business. And so, those will be the areas of priority for us over the next few years when we think about growing our insurance business.

Agriculture will continue to grow organically; global excess will make real a conservative push to add underwriters to those existing businesses. In the US specialty, you will see us expand the number of initiatives that we are serving.

Turning to reinsurance, our Bermuda business is cat business. If you look at that business, pricing in that market is being relatively stable over the last five years. Even if we have had some significant cat events that would be true internationally in 2011, we have not seen a lot of movement in terms of price. And so, it’s historically been profitable business for us. Our average loss ratio on our cat business over the 10 years (inaudible) is about 50%.

High margin business but high volatility business because the shift we are seeing in that market it’s less cyclical and the challenge in some ways is to access clients you have not seen before in Bermuda. So what we are doing is we are adding underwriters who are focused on the European marketplace. We are adding underwriters who are focused on the Asia-Pacific marketplace. We are starting to put those underwriters in the field, so we have historically underwritten this book-of-business from Bermuda. It’s where we are kind of focused to kind of hub the model that we have used.

We have taken some of our European team moved into Europe to Zurich. We are now being able to access some of the smaller European accounts that would have not have come to Bermuda. Over the next year, we will do something similar in the Asia-Pacific region. So, it’s a way for us to grow and it's a way for us to expand the diversification in that portfolio.

The other thing that we are doing is we are beginning to use third-party capital to support on our underwriting there. At the moment, 10% of that business is seeded to third-parties. Most of those are insurance companies that don’t have access to the risk themselves. Over the next year, we will likely add a certain amount of kind of collateralized capacity to split that business. And so, over the next couple of years, I would see that book-of-business growing and probably end up being about $500 million to $600 million of gross written premium but probably 20% to 25% of that premium will be seeded on the third-parties.

So we are essentially be moving towards more of a not entirely managed cat model but it’s a model where we are able to draw some fees of off that in addition to we call it risk taking revenue.

In the North American marketplace, this business is entirely driven to my mind by the market cycle and so if see the US commercial lines marketplace hardened, you will see this book-of-business grow rapidly for us. If we don't see that hardening, we kind of on the edge of the hardening right now, they are probably still be same size as it is. And then finally, we (inaudible) international expansion and really what we have been emphasizing there is expanding our ability to trade in the technical product space.

And so we brought on broad and Trade Credit and Surety team in Zurich last year. At January 1, they wrote about $30 million of premium, I wouldn’t be surprised to see that number grow through the balance of the year. We will be looking at agriculture for instance capabilities, personal accident capabilities, risk capabilities likely few others, and which you tend to find is the emphasize there is trading in the technical classes where your clients either have very large capacity needs or they trade in parts for their correlations present and they may need help for the risk managing the correlation.

And so, Trade Credit and Surety have got two things going on. On surety side, you find that insurance companies have to put out enormous amounts of capacity and to give you a sense of a contractor in Brazil, they can need $10 billion worth of surety capacity, it's just no way for them to source that capacity from within the Brazilian market.

The insurance companies in Brazil, they got by reinsurance, and the terms traded fair for reinsurers. On the trade credit side, this is sort of an emphasis on the credit cycle, and so in some ways that space is correlation associated with insurance companies like to trade with reinsurers who are more diverse than they are and we are diverse and we have a lot of credit risk in our company. It’s a natural space for us to support which tend to find the dynamics of that market a little bit (inaudible) we would think its like the US credit marketplace.

You are typically dealing with more smaller trade receivables, smaller credits. There is an (inaudible) of that market but if you can trade with someone has a developed diverse portfolio; you will find that the economics are pretty good over the cycle. They are definitely periods of time where the economics can be challenging and that was between 2008 and 2009. It’s a profitable market right now.

Those are the things that we are doing in terms of expansion. In terms of kind of channel cost expanding our reinsurance businesses relatively low cost and its really we have the infrastructure there in place to support that business. It’s about adding staff and you don't need to add large amounts of staff, you really need to add underwriters.

On the insurance side expanding our business, that's more complicated. You need more infrastructure and space, in place to support that expansion, and so what I have shared with investors is over the next couple of years I would expect our expense ratio to be a little bit higher reflecting that growth and that will take a little bit of time for revenues to follow that. In our business expenses lead revenues and what tends to happen is revenues lead profit. It’s just simply a function of the fact that in longer tail lines of business people tend to put the reserves up early and what we've seen over the last years is those reserves come down over time and generate sort of lagging income and so when you think about our financial model that will be visible in our numbers over the next few years.

In terms of kind of thinking about our business, I don't have any slides here on crop but I will spend a bit of time talking about crop insurance. A large part of our volatility in the company comes from being a cat writer, and so what we've done is we have catalogued the major catastrophe events that have taken place back since 2008. And so in 2008 you had Hurricane Ike, we worked away forward from 2008 today we have the different cats listed here. And what is shown is just those cats, a size of those cats as a percent of our equity in this company, give you a sense as to how much volatility we have embedded in the company's cat writer and I've done that for a range of companies that are specialty players, specialty reinsurance players particularly. And so yes we are a cat writer and does it dominate our overall income profile? No, it doesn't dominate our overall income profile.

We had some spots where we've been very kind of underweight. In fact we had kind of good results in Japan in the earthquake, such spots where we've been a little bit overweight and the tale is yet to be told on Sandy. But I think we are sort of about proportionate to others in terms of that. Not anyone has reported their Sandy losses at this point. So this is about the size of kind of risk I would see us taking going forward in the cat business. I don't see us ramping up our cat risk in proportion to our premium. It would probably lead us to sort of that point in the league tables in terms of sort of mix of business. In terms of how do we judge performance over the last few years, well, in our space we are compensated asset management team both on return on equity generated and growth in book value per share. And what you see over the last 10 years in the companies life is you see book value per share as its grown over time, plus dividends returned to shareholders, and so you can see we've had some very strong years over time, with compounded growth in the order of 10%. What is visible is just how challenging the last two years have been for us as a company. So kind of couple of things you know about our financial model, when you look at the mix of premium roughly half of our premium as a company comes from catastrophe reinsurance and crop insurance.

If you look at the last two years they have been challenging years. In 2011 we had about $100 billion worth of cat events as an industry, and in 2012 we had some challenging sort of weather experience in the US in recent memory. So our results clearly visible on our results for last two years. In 2012 our return on equity for the year was around 3%; that included a $160 million worth of cat losses and included a combined ratio in our crop insurance business of about 110%. I'd consider it a normalized combined ratio in our crop insurance business to be closer to 90%, that's what we've seen over time. And so the delta on our crop insurance business year-to-year is about $100 million in delta from the weather last year, and if you look at Sandy a $160 million of losses that's something in the ballpark of 7% to 8% of return on equity.

So looking to 2013 what is a normal return on equity for us as a company. Well if you have a normal year for me, a normal year would be a 90% combined ratio on our crop insurance business. It probably would be something like a $100 million worth of cat losses. On that basis, we are generating a 10% return on equity. We’ve had a clean year in terms of cats and you are quite quickly into double digit returns on equity. And so I fully believe in the business model that we are using, I believe in its ability to generate returns to investors. So I acknowledge openly to the group here and I’ve acknowledge sort of face to face, the last couple of years being tough for that model, a little bit over diversified and a little bit in the wrong place at the wrong time when it came to things like crop insurance.

But going forward, this is a business you can generate closing on double-digit returns. We're in a time right now where companies like these are just in my mind, under valued. I mean, it's for me to kind of, that’s my opinion. I can’t force that on others. We currently are market value today, we trade at $44 and I think $0.25. That’s an hour ago. Book value per share, $52.88; tangible book value per share closer to $48 per share. So on a tangible basis; we traded about 90% tangible book value per share.

If we really are at that spot where market prices are starting to improve, if we're at that spot, we have normalized returns. Those values don’t entirely make sense. But that’s where our sector trades right now. So if you come back in a years time. I think we're capable of producing significant growth in book value per share and helpfully investors will see it and believe it too.

In terms of just performance versus peers, what I have shown here is for compensation purposes, every person the company has compensated on the same set of metrics. For senior staff and myself, I am entirely compensated on return on equity and growth on book values per share versus peer companies. If you are a junior member staff, more of your compensation is derived from your goals. Your performance against personal goals, but for us this is the measure of success. So over the last six years you can see how we have done, going book value per share versus peer companies.

A year ago, this looked better. We are a little bit closer to the west end of the spectrum. After a tough year in 2012, we're little bit more in the middle of the pack, but historically we've done well versus peer companies and I have no doubt that we can move ourselves back to the left hand side of the spectrum overtime.

In terms of the nuts and bolts of our balance sheet, you can see our balance sheet there. We use a mixture of common equity, debt and preferential preferred stock. We did a fairly significant amount of share repurchasing over a period of time up to the beginning of 2011, and that actually culminated with a very large repurchase of stock at the beginning of 2011. You can see in terms of return to capital to shareholders last year, a definite kind of uptick in 2011. Over the last two years have been hopeful investors and that share repurchase was larger than what we had wanted to. We have an opportunity to buy out one of our original founding investors. At that time it was an all or nothing deal. We bought back $340 million worth of stock in February of 2011. Over the last two years we have been replenishing our balance sheet and going forward and doing that we really curtailed repurchases.

Going forward I would expect to see repurchases start to return probably not as aggressively as we have done before, but I would like to see the company both grow the balance sheet but also be a steady manager of capital. And so this quarter we will probably pay dividends in the amount of about $15 million and we will probably repurchase between $10 million and $20 million of stock and that will put us on a run rate of returning capital to shareholders of anywhere between a $100 million to $150 million a year. I think that’s about right for where we are right now. We see opportunities to grow the company going forward, so we need to [shepherd] our capital and same time valuations are not high enough that we shouldn’t be looking at repurchasing stock.

In terms of our investment portfolio, it’s a relatively short duration. I think our average duration of fixed income is about 2.7 years, high quality mixture of US government, high quality mortgage backed and asset backed securities. In terms of trying to access greater yield, roughly 10ish% of our portfolio would be in non-investment grade fixed incomes and not in fixed income not in investment grade. It’s a mixture of investments and alternates and equities, and really what we are trying to do is diversify the mix of risks that we are exposed to on the investment side, but at the same time maintain a sort of shortish high quality duration in terms of fixed income.

With that just couple of comments. I do think overtime we’ve made a sensible effort at growing our business. I think we have done a sound job of expanding into new markets. We have a fair amount of work to do to rebuild the company going forward and we are going through a certain amount of focus in terms of the way we build our insurance operations. We have gone through some significant management changes within our insurance operation that culminated in bringing Jack Hume to run that part of our operation. Over the next couple of years I think you will see the results both in terms of growth of premium but we call the mix of business we have there, and we have a very strong balance sheet; and even as we are player in the volatility space, we have the balance sheet to withstand that volatility.

We certainly look different from call it the standard lines writers and the first lines underwriters, but it’s a pretty typical balance sheet for companies in our space. We have a range of infrastructure in place for us to expand internationally and domestically. So I think we have the balance sheet to do the expansion, we are starting to get the staff in place to carry out that expansion, I feel very positive about where we are taking the company. So I think with that I am sort of edging up to the end of my time. I will open it up for questions or not.

Question-and-Answer Session

Unidentified Analyst

David, you mention on the reinsurance side specifically I guess the cat business using more third party capital, if you could expand upon that a little bit. Are you talking maybe starting a side car or simply using some of the alternative vehicles that are out there already?

David Cash

I think when I look at our core business we’ve build a good size diverse portfolio reinsurance, and in some ways I would like to see that grow, I would like to hold it for our own account. And being a little bit bigger would help us in terms of impacting the market place. So the natural way to think about increasing the size that part of our sort of capital, to increase the capital available status, I call it a quota shares not the reinsurance. So it’s much more natural to talk to capital providers about, sort of a pair of [shoe] sharing of that risk. Where do you see the opportunity grown at spot basis in individual markets and you see that at times and places like Florida, those tend to be one off opportunities that appear for a little while and then they disappear, its more natural to think about side cars, we call it short duration side cards to supply the capital support that business, and so in the main I think about organic growth is diversified.

If we can get a little bit of leverage for that through quota shares it would be natural to do it, and that would essentially become a permanent part of our capital base doing it that way. On less interest in some of the spot opportunities, they take a lot of effort and energy to deliver on. They are short term in nature and often it’s very hard to align kind of your third party capital with what your clients need from you in terms of capacity. So I have less of an interest and we call it spot solutions.

Unidentified Analyst

I guess in the first scenario where you do some sort of quota share that would free up capital and that's a capital intensive business when you are freeing it up. And I guess part of it would be to support growth elsewhere in the company. Would you free up some excess capital at that point with which you could buyback stock below book value.

David Cash

Certainly that will free up capital for us. The truth is we are going to accrete capital over time in terms of the way we underwrite, and so we are in a spot it probably didn't fully kind of spell it out, but we are going through a period of strategic expansion. I made the point about internationally on the reinsurance side and domestically in the US insurance market. While we go through that period of expansion and get it on track, I sort of am inclined towards the holding capital through that phase.

Once we get the growth on track, I'm confident we will see the income that flow often, and it becomes a little bit easier to think about where your balance sheet is headed and think about managing capital. So the next year I would expect to find clearly more stock than we did in 2012, and I expect to see that rate of repurchase grow frankly over time as we've become more confident that our expansion strategies are working. So if you get your expansion on track, it becomes more reasonable to predict income coming towards you and so it get to that spot I think to that virtuous spot where you are both investing in growth but also finding ways to repurchase and manage your stock.

Any other questions? I appreciate being here to talk to you today. Thank you for those who come and spent time with me one on one. I look forward to meeting with others who I'm going to spend time with later today and enjoy the rest of your day. Thank you.

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