Meadowbrook Insurance Group Q4 2008 Earnings Call Transcript

Feb.18.09 | About: Meadowbrook Insurance (MIG)

Meadowbrook Insurance Group (NYSE:MIG)

Q4 2008 Earnings Call

February 18, 2009 9:00 am ET

Executives

Robert Cubbin – President & Chief Executive Officer

Karen Spaun – Chief Financial Officer

Analysts

Bijan Moazami – Friedman, Billings, Ramsey and Co.

Beth Malone – KeyBanc Capital Markets

Walter Schenker – Titan Capital

Mark Dwelle – RBC Capital Markets

Tom Spiro – Spiro Capital

Brian Roman – Robeco Investments

Robert Paun – Sidoti & Co.

Operator

Welcome to the Meadowbrook Insurance Group fourth quarter 2008 conference call. (Operator instructions) It is now my pleasure to introduce your host Ms. Karen Spaun, Chief Financial Officer for Meadowbrook Insurance Group. Thank you. Ms. Spaun, you may begin.

Karen Spaun

Welcome to Meadowbrook’s fourth quarter 2008 earnings conference call. I will lead off today's call with a review of our financial results. Bob Cubbin, our President and CEO, will then follow with a review of our financial outlook and current market conditions. The call will conclude with a question and answer session.

During this call we may make certain statements relating to future results and expectations. These statements constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. We, therefore, must state that actual results may differ materially from those projected and may involve risk and uncertainties that are outlined in our Forms 10-K and 10-Q that are filed with the SEC.

Please note Meadowbrook undertakes no obligation to update or revise any forward-looking statement. If you have not received a copy of our earnings release, it is currently available on our Web site meadowbrook.com or you may give me a call and I will be happy to pass a copy to you.

As I go through the analysis, please keep in mind that our fourth quarter numbers includes three full months of ProCentury results, but because the merger closed on July 31, 2008, the year end numbers include only five months of ProCentury results.

For the fourth quarter of 2008, we reported net operating income of $12.3 million or $0.21 per diluted share up from $7.3 million or $0.20 per diluted share for the fourth quarter of 2007. Net income was $7.7 million or $0.13 per diluted share compared to $7.3 million or $0.20 per diluted share for the fourth quarter of 2007.

Fourth quarter net income includes after tax realized capital losses of $4.6 million or $0.08 per diluted share primarily due to other than temporary impaired assets related to certain preferred stock, corporate bonds and asset and mortgage-backed securities.

Fourth quarter 2008 net income also includes amortization expense of $1.7 million or $0.03 per diluted share. This compares to amortization expense of $621,000 or $0.02 per diluted share in 2007. Net operating income for the year December 31, 2008 was $38.8 million or $0.86 per diluted share up from $27.9 million or $0.84 per diluted share for 2007.

Net income was $27.4 million or $0.61 per share compared to $28 million or $0.85 per diluted share in 2007. Net income for the year includes after tax realized losses of $11.4 million or $0.25 per diluted share, which were the results of other than temporarily impaired assets primarily related to certain preferred stock investments, including Fannie Mae, Freddie Mac and Lehman Brothers, a few corporate bonds and some asset-backed and mortgage-backed securities.

Ninety-five percent of our fixed income portfolio is rated A or better and 99% is investment grade or better. Net income for the year ended 2008 also includes after tax catastrophe losses of $5.4 million or $0.12 per diluted share.

Amortization expense for the year ended December 31, 2008 was $6.3 million or $0.14 per diluted share, which compares to $1.9 million or $0.06 per diluted share for the same period in 2007. The 2008 fourth quarter GAAP combined ratio was 91.8% and includes 4.5 percentage points of favorable development on prior accident years. This compares to a combined ratio of 94% for the fourth quarter of 2007, which includes 4 points of favorable prior year development.

Prior year development for the fourth quarter was $5.5 million, primarily due to favorable development in auto and general liability lines offset by unfavorable development in an excess liability program. One point six million dollars of the aggregate favorable development was from the pre-merger Meadowbrook book and $3.9 million was from the ProCentury book.

The loss ratio for the fourth quarter of 2008 was 59.5% and was consistent with the fourth quarter of 2007. The 2008 fourth quarter expense ratio was 32.3% compared to 34.5% for the same period in 2007. The improvement was due primarily to a reduction in insurance-related assessments.

From an expense perspective, we expect similar quarterly results throughout 2009. The 2008 year end GAAP combined ratio was 93.3%, which includes 2.3 percentage points of catastrophe losses from Hurricanes Ike and Gustav and 4.5 percentage points of favorable prior year development. This compares to a combined ratio of 95.4% for the same period in 2007, which included 2.6 points of favorable prior year development.

In aggregate 2008 favorable prior year development was $16.8 million, and the favorable development was again from auto and general liability lines offset by unfavorable development in an excess liability program. Eleven point one million dollars of the aggregate favorable development was from the pre-merger Meadowbrook book and $5.6 was from the ProCentury book.

The loss ratio for 2008 was 62% compared to 61.2% in 2007. The 2008 expense ratio was 31.3% compared to 34.2% for the same period in 2007. The expense ratio improvement is due to the elimination of the fronting fees that we paid in 2007 prior to our A.M. Best upgrade to A minus, and our ability to leverage fixed costs over a larger earned premium base. Other factors contributing to the reduction in our expense ratio included lower loss control, expenses and commission due to our mix of business.

For the fourth quarter of 2008, gross written premiums grew 56.9% to $138.4 million, which includes $42.4 million from ProCentury. Excluding ProCentury, gross written premium grew by 9%. Included in our fourth quarter results are $4.6 million or $0.08 per diluted share of the after tax real life investment losses primarily due to other than temporary impaired assets. These impairments were primarily related to preferred stock investments, which included Royal Bank of Scotland.

We also recorded impairments on a handful of corporate bonds, which included General Motors, Genworth, Majestic Star Casinos [inaudible]. Despite these impairments, we saw some stabilization. Some of our asset classes improved significantly compared to the third quarter of 2008.

Municipals improved as buyers came back into the market alleviating some of the supply and demand mismatch of the third quarter. And mortgage-backed securities improved due to an announcement that the federal government would begin buying mortgage-backed securities in the open market.

We continue to believe the commissions affect on our fixed income portfolio are temporary and we have the ability and the intent to hold fixed income securities to maturity or recovery. We continue to have strong cash flows and we are under no pressure to sell securities to support liquidity.

We have increased the frequency of our meetings with our outside investment advisors. Our portfolio remains corporately conservative. The average S&P rating on our fixed income portfolio is AA+. Only 2.1% of our portfolio is allocated to equities, which is limited to preferred stock and bond mutual funds. And the allocation to commercial mortgage-backed securities is 2.4%, and the average S&P rating on these issues is AAA.

The duration of our fixed income portfolio is 4.5 years compared to 4.3 years as of December 31, 2007. Our pre-tax yield is 4.3%, after tax yield is 3.3%, and since the beginning of 2009, our pre-tax reinvestment yield has increased slightly to the range of 5% to 5.5%. We expect this range of reinvestment yields will be achieved throughout 2009.

For the fourth quarter, fee-for-service pre-tax income increased to $2 million from $1.1 million in 2007. For the fourth quarter of 2008, we reported a pre-tax margin of 6.7% compared to 5% in 2007. The increase reflects the elimination of the USSU management fee upon executing the buyout of this agreement in the first quarter of 2008. These reductions and expenses were somewhat offset by a decline in our fee-for-service revenues and our small comp business in New England. These fees are based on premium level and there have been mandatory rate reductions in workers compensation.

For the year, revenue from managed program and commissions were $32.8 million compared to $36.1 million in 2007. As indicated, some of our managed program fees are based on premium levels and the mandatory rate reductions in competition throughout the year impacted our managed program revenue.

Additionally, commission revenue in 2008 was slightly down compared to 2007 due to increased competition in certain jurisdictions. In 2009, we expect revenues from our managed program business to decline slightly and we expect agency commission revenue to increase slightly on growth in our Michigan agencies.

Excluding intra-segment revenue, which is a line item in our commission of fee summary but has no impact on consolidated results, in 2009 we expect managed program and commission revenues to be flat because of 2008.

Now, I will turn the call over to Bob.

Robert Cubbin

Obviously one of the big events for us in 2008 was our merger with ProCentury. We’re coming up on the anniversary of the announcement of the deal, and so far we have been very pleased with how well the integration has proceeded. We’re executing on several revenue enhancement opportunities and leveraging the shared infrastructure.

We’ve launched a new wholesale relationship in the Midwest. We’re filling a surplus lines market need for a major Meadowbrook partner in New England. We’ve expanded Century product offerings into new states through Meadowbrook’s admitted market capability. We appointed a major century agent to expand in a workers compensation market for Meadowbrook.

In terms of the opportunities to leverage of shared infrastructure, we have consolidated some of the corporate back office, streamlined accounting and finance, and we are capitalizing on enhanced business development capabilities by having more comprehensive risk management offerings and a combined marketing platform. We’ve developed centers of expertise for claims management and we’ve been able to generate reinsurance cost savings through the increased size and diversity of the merged companies.

This is really only the beginning. As the year unfolds, we should see even more benefit from the merger. Earlier in the year we also financed the second half of the USSU acquisition. That acquisition continues to perform well and offers a combination of fee based and underwriting revenue. These transactions position us for long-term growth and stability across market cycles. They support our model of diverse revenue sources and complementary admitted and non-admitted insurance company capabilities.

Our combined business development team has played a meaningful role in our continued success in growth. They have the responsibility for identifying, guiding, and implementing new programs. In 2008 we launched 18 new proven programs, a tremendous accomplishment given the market condition. Program development takes time, but as the programs gain traction, they become more predictable and a stable source of revenue and profit. We’ll see the benefits of those new programs grow in 2009.

As Karen mentioned, we recorded some other than temporary impairments on our investments in the fourth quarter. While it’s a disappointment to have to record impairments in the first place, we’re happy that in spite of the continued financial market uncertainty, the sequential quarterly amount of impairment was quite low. During the fourth quarter and into this quarter, there have been some improvements in certain asset classes, and our conservative investment philosophy has served us well during the financial crisis.

We have always maintained a conservative investment philosophy, even when it was fashionable to seek higher yields by increasing risk and volatility. One of the benefits of our approach is usually a greater degree of stability and predictability in the income generation potential of our portfolio. In 2009, we expect continued pressure on investment yields, but we believe we can generate investment income in the range of $49 to $51 million pre-tax.

As far as the insurance market is concerned, competition levels and suggestions about the market firming are among the most common topics we are asked to discuss. The factors that normally signal market stabilization and firming still exist, and there continues to be pressure on capital and capacity due to depressed underwriting profitability, catastrophe losses, and an uncertain and difficult investment climate. In light of this, many people have started to call a turn in the market. We don’t budget for that, but it is more probable than not that it will occur.

We believe that overall the specialty insurance market will continue to be competitive in 2009, but less so than last year. Throughout 2008 we experienced declining rates and on average Meadowbrook’s rates were down about 4% while Century’s were down about 6%. The overall market for excess in surplus lines contracted in 2008 as the standard market continued to write some of that business. This occurred even at the small account end of the spectrum. We expect that the standard market will, as usual, eventually migrate away from what has historical been surplus lines risk.

Overall, property rates have held up reasonably well but there’s still a lot of competition in general liability. Two thousand eight was challenging on many fronts, but all told we had a good year. We completed a major transaction and were able to access the credit market to do it. Gross written premium increased by over 32% including about $80 million from Century in the last five months of the year.

Net operating income was $38.8 million, an increase of 39% compared to ’07. Our 2008 cash earnings, which excludes amortization expense, was $1 per diluted share compared to $0.90 per diluted share in 2007 on a much lower share count in ’07. We think our underwriters and claim staff, as well as our whole team, did a great job this year contributing to a combined ratio that declined nearly 2 percentage points in a year where we had 2.3 percentage points of catastrophe losses.

Our actions in 2008 have set a solid foundation for ‘09 and beyond and we’re excited about the ability to perform from a position of strength, strength of our balance sheet and strength of our team. We have the liquidity and capacity to take advantage of the change in the market and the dexterity to do well, even if it takes longer for the market to improve.

As we’ve said in the past, we believe that the market will firm, we just don’t know exactly when and we view 2009 as a transition year for the industry. Our plans consider a range of scenarios that include continued market softening, a flat market, or some firming.

During our third quarter call we established a range of guidance, which included net operating income of $46 to $52 million or $0.80 to $0.90 per share. Combined ratio between 95 and 97 and gross written premium between $725 and $740 million. We are sticking with that range.

However, many months have passed since we initially issued that guidance, and based on our observations and experience over that timeframe, particularly the actual and projected returns in our investments, we believe that performance in the low end of the range is still very achievable, but it will be more difficult to meet or exceed the high end of the range.

If the investment returns for safe predictable fixed income securities improves, it will help us move up in the range of probable outcomes. If the market firms more quickly, that will benefit us, if loss reserves continue a favorable trend that will help us.

All that said, we are optimistic about our growth prospects for earning in ’09 and expect to see improvements in our transportation, workers comp, environmental and contractor segments. We don’t include unidentified programs or initiatives in our budget, and to the extent that we execute on new unidentified opportunities, we can enhance our performances in the range.

On another note, earlier this year Meadowbrook founder, Mert Segal, announced his retirement. For all of Mert’s business accomplishments and contributions, which are many, his legacy at Meadowbrook will include the professional and gentlemanly way that he treated the people that he worked with.

On behalf of all Meadowbrook associates, I thank Mert for his years of leadership and commitment. And while we will miss the day to day contact with Mert, he will continue to serve as a member of Board of Directors and will thereby continue to provide us his guidance and vision.

At this point, operator, we’ll open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bijan Moazami – FBR Capital Markets.

Bijan Moazami – FBR Capital Markets

I have a number of questions and it will be regard to ProCentury and what you saw after the merger. In particular did you see any kind of reserve adjustment to the pre-2002 liabilities of ProCentury?

Robert Cubbin

No. Most of the reserve adjustments are from the ’05 and ’06 accident years, and maybe a little bit of ’07.

Bijan Moazami – FBR Capital Markets

And you alluded a little bit to opening up new offices getting new agents. Can you be a little bit more particular in terms of how much cross selling you predict or you see so far with the acquisition of ProCentury?

Robert Cubbin

While it’s been a little bit more modest at this point, what we see is the opening up of those markets so we’re going to see substantial growth in 2009, Bijan. So in the fourth quarter we saw a little bit it’s going to be less than $7 or $8 million but going forward it should be very, very substantial into ’09 because that’s really just the beginning of what we’re seeing is getting those markets opened up.

Bijan Moazami – FBR Capital Markets

In terms of how the company expenses, how much cost cutting have you been able to achieve in terms of auditors fee and accountant fee and stuff like that.

Robert Cubbin

Well, in the first year of the merger we really didn’t expect to see a whole lot of decrease in that. We were only combined for five months and as our auditors for the first time also were auditing Century, I think that in general the audit fees were probably up from where they were last year. But going forward, we should see some decreases in that as we create more efficiency.

On the public company side, again, we only had five months to combine and we really were expecting an increase in some of the expenses as we take on some of the severance and the restructuring that we had to incur in order to get a more efficient platform going forward. So we’ll see more of that savings during 2009, but I would say in general it’s pretty much in line with what we expected maybe it will be a little better.

Reassurance costs, I think, have come down a little bit as we’ve been able to combine some our treaties. But the real meaningful part of the ProCentury Meadowbrook merger was the growth opportunity. And as you can see from our projections for 2009, we have very, very substantial growth built into that over 135 million of new business. So we’re really looking more towards expanding and growing the opportunity as opposed to wringing out every last dollar of expense.

Bijan Moazami – FBR Capital Markets

Was there any surprises whatsoever in the period of your ownership of ProCentury yet?

Robert Cubbin

Well, I wouldn’t say anything internal. I mean, obviously the change in the credit market the financial crises that occurred after the merger certainly surprised everyone, and negatively impacted the industry in general. I’d say the biggest surprise is more of a positive one. We’ve gotten along very, very well we feel very strongly that we’ve got a great team of people there, and I think in general it’s going to be even better than I had anticipated. So no negative surprises at this point, Bijan, their business performed well.

Obviously, the excess in surplus lines market has been under a great deal of stress over the last year. So their premium production is probably less than we would have expected when we announced the deal a year ago. But we do see the opportunity for growth there and the turn in the market will be something that they can take advantage of. So probably a little lower premium volume but that’s about it.

Operator

Our next question is from Beth Malone – KeyBanc Capital Markets

Beth Malone – KeyBanc Capital Markets

Could you just clarify a couple of points for me, Bob? On the pricing, in the commentary and the press release you said when it ends and you mentioned that a lot of people are calling the turn, specifically are you getting indications from your markets that you’ve been able to get prices to stick or have there been price increases in any of the markets in which you are operating?

Robert Cubbin

Yes. On the non-comp side, Beth, we saw slight improvement in pricing in the fourth quarter. In the first quarter, we’re hardly into it yet, but we’ve been pushing rates where ever we can. But it’s really a matter of time before that switches over. The workers comp market is very regulated.

We did see an announcement out of Florida that rates are going to go up there, which is good. We think the rate increase will actually benefit us less than the change in the law and the attorney fee cap so we see a benefit there. Other parts of the country on the non-comp side we do believe we can achieve rate increases.

The biggest factor for ProCentury, other than Meadowbrook really, is admitted markets moving back into their standard type lines and getting out of some of the things that have historically been excess in surplus lines type risk. So that to me is more important. And, as we said, we only saw 4% on the Meadowbrook side and 6% decline on the Century side, so we don’t have a long way to climb out of a big hole that maybe other companies and maybe standard market who have cut rates a lot more.

So in 2009 our budget, if you will, our plan, if you will, is to see some firming, particularly near the second the half of the year, but not very substantial. I think 2010 is more likely to be a year in which we can achieve greater rate increase so not really planning for that increase. If it occurs more quickly then we’re prepared to take advantage of it, particularly on the Century side.

Beth Malone – KeyBanc Capital Markets

Well, with the pricing environment kind of moderated here, do you see the speed of growth the projections or expectations you had for moving forward with ProCentury the branches you’re talking about, has that slowed down from what you originally envisioned because of pricing competition?

Robert Cubbin

Definitely. There’s no question that that occurred, but, again, we believe that’s pretty much of a temporary condition based upon where the market is today, and we expected that. We didn’t buy ProCentury for 2008 or 2009. It’s a combination and a capability that will help us manage through market cycles for many, many years. So, as we put our plans in place, it’s a multiyear strategy and it gives us greater flexibility to mange our way through the ups and downs of the cycle.

Right now we’re at an inflection point so we have to be very diligent in how we look at the market because you want to push price, but you also don’t want to create adverse selection and drive away your best business. So you have to do that incrementally and you have to do that intelligently and you have to do that state by state program by program, which is what we have in place.

Beth Malone – KeyBanc Capital Markets

One last question, I noticed that you made some purchases of shares in the fourth quarter a modest amount. What’s the plan for that going forward?

Robert Cubbin

Well, as we said in the past, share repurchases where we have liquidity and we don’t have the use for the capacity in the insurance company operations do make sense, particularly when we’re trading below book value. So we will opportunistically look at that.

But right now we do believe that having dry powder, having capacity in order to take advantage of the market as it burns, it’s very important for us to maintain our capital and liquidity and use that capacity to write good profitable business. So we will look at that as we go through 2009, but I wouldn’t say it’s a major part of our capital management strategy at this point. I’d rather deploy that capital when the market starts to turn at the end of ’09 and into 2010.

Operator

Our next question is from Walter Schenker – Titan Capital.

Walter Schenker – Titan Capital

In looking at the 2009 and your forecast for 2009, to what extent does favorable development of prior year reserve play a role in that or is there none?

Robert Cubbin

Walter, we do not anticipate favorable or unfavorable development in our plan or our guidance because right now, as far as the balance sheet, we selected the ultimate that we think are appropriate. If favorable development on the claims side in that trend continues, then we could see favorable development.

We have seen over the last few years a decrease in claim frequency, and so as that evidence emerges, then both our internal and our external actuaries will take that into consideration and stating what their accident year ultimate are. But as far as the plan or our budget, we do not budget for favorable or unfavorable development.

Walter Schenker – Titan Capital

Secondly, and going back to the prior question on share repurchase, you did have fairly restrictive covenants as to your ability to buyback stock. Could you just sort of up date us if you should decide to do it sort of how much room you actually have.

Robert Cubbin

That’s kind of a moving target because the bank covenants are based on a rolling 12 months so that sort of changes over time as we pay down the bank debt and as we amortize that debt it opens up additional room for us. We also have the ability to go back to the bank and say look here’s a good economic decision to make give us a waiver to do that.

So I don’t think we’d have any problem with that with our very, very strong capital position and our liquidity position. I don’t think the bank would have a problem with that. But we’re not in a big hurry to buy back a ton of shares at this point anyway, as I said in answer to Beth’s question. We believe that in the near-term we will be able to deploy that capital more beneficially from an economic standpoint than a lot of share repurchases.

Walter Schenker – Titan Capital

As a statement and not a question, I take exception to that statement. It seems to me for a company that’s going to earn $0.80 a share with the stock selling a couple of bucks below book with $0.80 on, we’ll make life simple, the $6.00 stock you’ve opened up higher.

The return on investing in your own shares and permanently lowering the denominator when you have those opportunities in the, picking a number, the five range, is going to get me as a shareholder much higher return over time than writing new business, unless you get to a very ebullient pricing environment, which is unlikely to happen, at least this year, it may happen in a year or two.

And so I do take exception as a shareholder to that view. I’m not saying we should lever up. I’m not saying we should not run the business well. I am saying that there are opportunities to buy back stock and that’s probably better than writing new business at the increment.

Robert Cubbin

Walter, we don’t disagree with that as kind of an absolute statement, but we have to balance that with everything else we have in terms of our capital management. So, as we’ve shown, we are not adverse to buying back the shares, but it’s just not going to be the most important or major use of our capital, at least over the next couple of months.

Operator

Our next question is from Mark Dwelle – RBC Capital Markets.

Mark Dwelle – RBC Capital Markets

A couple of questions, first a couple of numbers questions, could you tell me again the amount of favorable development in the quarter both in terms of the number of combined ratio points and dollars?

Karen Spaun

Yes. Mark, $5.5 million of favorable development in the quarter and that’s 4.5 percentage points.

Mark Dwelle – RBC Capital Markets

Then in terms of the amortization expense in the quarter, can we regard that figure as sort of an indicative run rate now that the deal’s been closed and we presume most of the major pluses and minuses in terms of settling the deal structure have been considered?

Karen Spaun

Yes. You can do that. It will change slightly from year-to-year because USSU will actually drop off a little bit, but ProCentury will actually build up a little. That’s a pretty fair representation.

Mark Dwelle – RBC Capital Markets

Turning to a couple more macro sort of questions, as you look across your business platform, particularly on the Meadowbrook side with some of the programs, are there any industry concentrations, any areas where Meadowbrook has relatively more program exposure? I’m really just thinking more in terms of with the economy as weak as it is on a broad base if there’s any areas where there’s some potential for some pretty significant unit count erosion.

Robert Cubbin

I’d say probably on balance our largest industry is agricultural, which we have a number of diverse programs that touch that space. But other than that, I think you look at the economy in general and we probably have a fairly broad base representation of that economy. Obviously, contractor is a big part of the economy. It’s not a huge concentration for us, but obviously with commercial and residential building being what it is, we’ve shifted away from some of that.

Transportation is another area that we are fairly large in and, as you know, we have to get goods here and there and the transportation side of the house is still doing okay. We do anticipate some exposure based reductions in a number of those areas as a result of the continued recession, but I think what we’ve tried to do, Mark, is to stay diversified both geographically and by class of business, and I think we’ve accomplished that.

Mark Dwelle – RBC Capital Markets

Then the last question I had is just as a matter of data point, do you have any plans to sort of breakout the portion of premiums that are coming from E&S as compared to, I’ll say, your more traditional program and admitted lines.

Robert Cubbin

Well, we really don’t and there’s a reason for that and it’s mostly because both Century and Meadowbrook approached the business from a specialization standpoint. So we really look more at classes of business and segments of business as we look at excess and surplus lines and specialty program side, and we do expect to see some shift between excess and surplus lines and admitted. But overall the way we’ve looked at our segments is the specialty insurance market as one unit.

Operator

Our next question is from Tom Spiro – Spiro Capital.

Tom Spiro – Spiro Capital

I have a couple of questions. Number one, with respect to ProCentury what were ProCentury’s full year 2008 gross written premiums please?

Karen Spaun

It was approximately $225 million.

Tom Spiro – Spiro Capital

And in your 2009 budgets, you are anticipating significant growth in gross written premium. Is much anticipated to come from ProCentury or is that really sort of flattish and it’s all coming from the old Meadowbrook side?

Robert Cubbin

We do anticipate some growth on the Century side because, as I said, when the admitted markets start backing out of some of the traditional surplus lines risk, we do expect to see growth there, but they’ve also created a number of new initiatives. One in the environmental area and inland marine that we think are going to bear some fruit in 2009, so most of their existing GA business is probably flattish.

We’ve also, as we said, introduced them to our New England distribution system so we expect to see some growth there. We’ve added a new GA in the Midwest, which should offer some growth. So it’s a combination of items, Tom. So we do see them growing based on their initiatives, and if the market turns, then they certainly have an opportunity, particularly at the end of the year and into 2010, to have substantial growth if we see a much more firm market.

Tom Spiro – Spiro Capital

Speaking of firm markets, as between the reinsurance market and the primary market, which of the two do you think that might firm first, if either firms at all?

Robert Cubbin

Generally reinsurance has kind of led that charge and, again, at this point in the cycle change what we tend to hear is a lot of CEOs talking about the market firming, and that certainly has to happen before it will. But it takes time for that to filter its way down to the desk underwriters. So I think the conversation certainly precedes the execution in that regard. It’s good to see all of the discussions centering around the need for market firming and then we’ll start to see that translate into actual rate increases on a lag basis.

So the reinsurance side tends to start and then the primary, obviously, has to absorb any changes in the reinsurance pricing. But quite frankly is kind of being driven at both ends because you’ve got investment returns that have hurt capacity. You’ve got catastrophe losses in 2008 that have reduced capacity, and you’ve got a significant overall decrease in underwriting profitability in the commercial property casualty side. So I think it really should come from both sides.

Tom Spiro – Spiro Capital

Speaking of reinsurers, do we have any payment issues, delayed payments or credit concerns those kinds of questions with respect to our reinsures?

Robert Cubbin

No. So far we have not had any of those and we don’t expect any. We keep a very strong long-term relationship with the reinsurers and try to keep that at a very, very high quality and we’ve been successful on that so far.

Tom Spiro – Spiro Capital

And how about same question regarding our risk sharing partners who themselves may be under financial pressure these days?

Robert Cubbin

No issues there whatsoever. Those are all wholly collateralized.

Operator

Your next question comes from Brian Roman – Robeco Investments.

Brian Roman – Robeco Investments

You may have answered these already. Regarding the balance sheet, what’s the debt repayment schedule at this point?

Karen Spaun

It’s a five-year amortization.

Brian Roman – Robeco Investments

This is on the debentures?

Karen Spaun

No. On the debentures they’re all 30 years there’s no requirements for any payments on the debentures for quite some time.

Brian Roman – Robeco Investments

And the debt?

Karen Spaun

The debt started off at $65 million and it has a five-year amortization period.

Brian Roman – Robeco Investments

So it’s done in five years.

Karen Spaun

Correct.

Brian Roman – Robeco Investments

Then I may have missed this, also the investment portfolio, which is not as bad as some but still took some hits. What comment would you make about where the portfolio stood on January 31st?

Karen Spaun

It actually has improved subsequent of year end. Mostly the tax exempt municipals have come up quite a bit in ’09 already.

Brian Roman – Robeco Investments

So if you could do a January 31st book value per share, given all the turmoil in the marketplace, would you say it’s up at this point?

Karen Spaun

Yes.

Operator

Our final question is from Robert Paun – Sidoti & Co.

Robert Paun – Sidoti & Co.

Just a question on the ProCentury side. Is there some seasonality to that book of business? It seems like the premium volume has been light in the fourth quarter the past two years. Can you just comment on that?

Robert Cubbin

Yes. There is seasonality to just about everything that occurs and they’re no exception. I don’t recall exactly which of their programs or classes that was the case. I’ll look into that, Robert, and be sure to report on any seasonality at the next quarter.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Robert Cubbin

Thank you very much. We very much appreciate you all participating in the call and we look forward to continued good results into 2009 and hope to see you all soon. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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