American Safety Insurance Holdings Ltd. Q4 2008 Earnings Call Transcript

Mar. 5.09 | About: American Safety (ASI)

American Safety Insurance Holdings Ltd. (NYSE:ASI)

Q4 2008 Earnings Call

March 5 2009 9:00 am ET

Executives

Stephen R. Crim – President and Chief Executive Officer

Joseph D. Scollo, Jr. – Executive Vice President and Chief Operating Officer

William C. Tepe – Chief Financial Officer

Analysts

David Lewis – Raymond James

Kenneth Billingsley – Signal Hill Group

Neal Goldman – Goldman Capital

Operator

Welcome to the American Safety fourth quarter 2008 earnings call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stephen Crim, President and Chief Executive Officer for American Safety Insurance. Thank you, Mr. Crim, you may begin.

Stephen R. Crim

Welcome to our conference call to discuss our results for the fourth quarter and year ended December 31, 2008, which were issued after the market closed yesterday. In addition to those participating on this telephone conference, this conference call is being broadcast over the internet. With me in the room are Joe Scollo our Executive Vice President and Chief Operating Officer, and Bill Tepe our Chief Financial Officer.

Before we begin, I would like to remind everyone that this conference call will contain forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially. For a description of some of the reasons that results may differ, please see our Form 10-Q for the quarter ended September 30, 2008 as filed with the SEC.

Now turning to the results for the fourth quarter, we experienced a net loss of $8.2 million, which included $6 million of realized losses from other than temporary impairment of investments. Gross premiums written in the quarter improved 8% over the same period last year, due primarily to increased writings in the Assumed Reinsurance Segment.

The results for the quarter also included reserve strengthening, reinsurance reinstatement premium, and a valuation allowance for reinsurance recoverables totaling $8 million. The reserve strengthening and reinsurance reinstatement premium stem from adverse claims development from New York environmental contractor business arising from accident years 2002 to 2006.

We began significantly reducing writings in the New York environmental contractor market in 2007 and have approximately $1.2 million of in force premium remaining, which will be non-renewed during the course of this year. At the end of 2008, we conducted an extensive claims review in combination with an actuarial analysis, including both our internal and independent actuaries.

At the end of 2008, we had $26 million of reserves related to New York environmental exposures, of which approximately 45% is IBNR. Based on our year end analysis, we believe these reserves to be sufficient to cover our ultimate liabilities on this line of business.

The valuation allowance was established as a result of increased credit risk with certain reinsures where the company has insufficient collateral to cover the ultimate projected losses. I’m disappointed in the fourth quarter results, which led to management’s decision not to pay bonuses in 2008. We have discussed the fourth quarter results with A.M. Best and do not expect the net loss to impact our A rating.

Two thousand eight was a difficult year for both the insurance industry and American Safety Insurance. A significant amount of capital was depleted from the industry due to a combination of investment and catastrophe losses. While it appears that the industry remains adequately capitalized, the current environment necessitates a change in market conditions to stabilize insurer’s balance sheets.

However, even if rates stabilize during 2009, we believe the economy will place downward pressure on our insured’s revenues and on the overall demand for insurance leading to a reduction in premiums. As a result, I expect our 2009 gross premiums written to decline by approximately 10% to 15%, and our combined ratio to be in the range of 102% to 104%.

Despite the losses we experienced, our balance sheet remains strong and our book value per share remains at $21. The strong cash flow from operations has significantly increased our investment portfolio, which we expect to improve investment income this year even in the face of declining yields.

The diversified product platform that we’ve created over the past three years has resulted in more than one-third of our written premiums being generated from newer products last year, and sets the stage for more significant growth and improved profitability when market conditions improve.

I’ll now turn the call over to Joe Scollo to provide you with an update on our insurance operations.

Joseph D. Scollo, Jr.

All comparisons are for the quarter ended December 31, 2008 to the same period in 2007, unless otherwise noted. Gross written premiums for the quarter increased by $4.1 million or 8%. Premium growth was attributable to a $5 million increase in writings in our Assumed Reinsurance Segment. Premiums from our newer product lines contributed 35% of our gross written premiums for the quarter and more than offset a 48% decline in our construction line.

For the 2008 year, construction line premiums represented 13% of our total gross written premiums versus 27% for the 2007 year. Market conditions remained very competitive in all of our lines during the quarter. Gross written premiums in our Excess and Surplus Line Segment declined 4% to $29.7 million driven by a $5.8 million decline in construction line premiums.

Our construction premiums have been impacted throughout the year by the slowing housing market, soft market pricing and our exercise of underwriting discipline in a very competitive market. Our newer property, healthcare, excess and product liability lines contributed nearly $10 million of gross written premiums during the quarter. We believe we can achieve more significant growth in these product lines when market conditions are more favorable.

Surety premiums grew by 53% reflecting the impact of our expansion efforts into the specialty surety and Small Contractor Sector in 2007. Environmental premiums declined 8% primarily due to our decision to run off our New York general liability book of business as a result of adverse loss experience.

In mid-2007, we added more restrictive language to our New York policy form resulting in reduced New York premium writings. In October 2008, we began the process of non-renewing the entire book of New York general liability business. There are approximately 68 general liability policies remaining representing premiums of approximately $1.2 million. The exit process will be complete by the end of the third quarter.

We continue to focus our efforts in this product line on small account and affinity type business. Gross written premiums in our Alternative Risk Transfer Segment increased by 1.3% to $18.7 million. The increase was primarily due to premium writings from new programs added in 2007 and 2008 more than offsetting declines in more mature programs, due to the impact of the softening market and the exercise of underwriting discipline by our program managers.

Our Assumed Reinsurance Segment generated premiums written of $11 million during the quarter, an increase of $5 million over the same period in 2007 due to the additional relationships added by the new staff member Bermuda Operation. Our focus in this segment is on traditional and structured reinsurance solutions for small specialty insurers, risk retention groups and captives.

There’s been a lot of talk in the industry about an onset of a hardening insurance market in 2009. Thus far, we have seen some encouraging signs of stabilizing or increasing rates in our assumed reinsurance business realizing a 3% rate increase on January business rate.

In our other product lines, rate declines have tempered for some products, but we’ve seen no notable signs of a turn in the market. We expect weak economic activity to adversely impact the revenues of many businesses and the demand for insurance. As a result of these and other factors, we’re projecting a 10% to 15% decline in our gross written premiums in 2009.

We anticipate the decline will occur primarily in our construction, environmental and assumed reinsurance product lines. As respect to our environmental line, four new competitors focusing on middle market business have entered the environmental marketplace in just the last few months. We expect our middle market premiums to decline as we let business go that we believe will not be adequately priced.

In our Assumed Reinsurance Segment, 2008 premiums included two non-recurring reinsurance transactions and we expect writings to be further impacted as we shift the focus of our writings away from quota share business to excess of loss business.

In the remaining product lines, we’re anticipating flat to slight increases in premium writings for 2009. While we are anticipating a decline in our 2009 premium writings, we’re confident that we’ve built a platform that can be a leverage for growth when market conditions improve. In the meantime, we must focus our efforts on maintaining underwriting discipline and improving our efficiency to preserve profitability over the long-term.

I’ll now turn the call over to Bill Tepe for a review of our fourth quarter and year end financial performance.

William C. Tepe

The $8.2 million net loss for the quarter included realized losses due to other than temporary impairment of our investment portfolio, net prior year adverse reserve development, reinsurance reinstatement premiums and an allowance on reinsurance recoverables.

The $6 million other than temporary impairment of investments is composed of realized losses of $3.8 million on our fixed maturity portfolio, $1.2 million on preferred stocks, and $1 million on the common equity portfolio.

Of the $6 million realized loss, $5.6 million relates to securities issued by companies in the Financial Services Sector. The $3.9 million reserve development primarily relates to 2002 to 2006 accident years of the environmental book of business written in New York.

The $1.6 million reinsurance reinstatement premiums also relate to losses in our New York environmental book of business that pares upper layers of our reinsurance treaties, requiring either accrual or payment of additional premiums to our reinsures.

After a detailed review of our reinsurance recoverables and related collateral, we determined an additional valuation allowance was prudent. In the fourth quarter, we recorded additional allowances of $2.5 million bringing the total allowance to $3.8 million. The reserve development, reinsurance reinstatement premium and the valuation allowance increased the loss ratio by 10.4 basis points and the expense ratio by 6.6 basis points.

Revenues for the quarter were $48.6 million, an increase of $6.2 million over the 2007 quarter. Excluding net investment losses, revenues increased $12 million to $55 million due to increased net premiums earned from newer lines of business, primarily assumed reinsurance.

Net investment income decreased $300,000 to $7.5 million due to lower yields. Average invested assets were $654 million, an increase of 8% over the 2007 quarter, but the average yield decrease to 4.5% from 5.1%.

Losses and loss adjustment expenses totaled $33 million, an increase of $10 million primarily due to the $3.9 million reserve development and increased net premiums earned. Acquisition expenses increased $5 million due to increased net earned premium and changes in the mix of business, as the decrease in construction earned premium was replaced with earned premium from the assumed reinsurance that has a higher acquisition cost.

Payroll related expenses increased $400,000 to $4.7 million as a result of increased headcount, primarily from the healthcare division acquired in 2008 and normal salary adjustments. The increases were partially offset by the reversal of the previously accrued bonus since cash bonuses for 2008 will not be paid. Other underwriting expenses increased $2.3 million, primarily due to the accrual of the allowance on reinsurance recoverables.

Now turning to the year end results, the results were negatively impacted by $14.3 million of net realized losses on the investment portfolio, $5.4 million of adverse prior year reserve development, and in the fourth quarter, reinstatement premiums and allowance on reinsurance recoverables. Net premiums earned increased $26 million to $174 million due to increases from our newer lines of business.

Net investment income decreased to $29.6 million as the average yield decreased 60 basis points to 4.6%. Losses and loss adjustment expenses increased $19 million as a result of increased net premiums earned and the $5.4 million reserve development, primarily related to New York environmental business.

Acquisition expenses increased $15 million due to three factors, increased net premiums earned, the full year impacted the casualty excess of lost reinsurance treaty, and a change in the mix of the business. The $3.4 million increase in other underwriting expense includes $2.5 million valuation allowance on reinsurance recoverables and increased depreciation expense.

Cash funds from operations increased to $101 million in 2008 from $67 million in 2007. The increase is due to increased collections of premiums and reinsurance recoverables offset by higher paid claims, acquisition expenses and other operating expenses. Paid claims in 2008 increased $15 million to $56 million.

The investment portfolio totaled $674 million at December 31, 2008 compared to $617 million in 2007. The portfolio was composed of $80 million of short-term investments, $21 million in common stocks, $3 million in preferred stocks, and $570 million in fixed maturities.

The fixed maturity portfolio is composed of $62 million of U.S. government securities, $186 million of mortgage-backed securities issued by U.S. government agencies, $252 million of corporate securities, $42 million of municipal securities, and $48 million of commercial mortgage-backed and asset-backed securities.

The fixed maturity portfolio of December 31, 2008 had an average rating of AA, an average duration of 3.7 and a tax equivalent yield of 5.5%. During 2008, we incurred realized losses of $13.7 million due to the other than temporary impairment of the investment portfolio. All but $400,000 of the loss relates to investments in the Financial Sector. Impairments totaled $9.4 million for fixed maturities, $3.3 million for preferred stock, and $1 million for common stock.

In addition, due to credit concerns, we sold $17 million of other Financial Services Sector fixed maturity securities in the third quarter, realizing an additional loss of $1.4 million. At December 31st, our fixed maturity investment in the Financial Services Sector totaled $55 million. Unrealized losses on investment net of tax at December 31 totaled $3.2 million compared to unrealized gains of $4.9 million in 2007.

We are now ready for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Lewis – Raymond James.

David Lewis – Raymond James

A couple of questions, first, kind of given the adverse reserve development and the period, are there any other areas within your book of business that you’re monitoring more closely? Or do you feel like based on the claim trends you’re seeing today, that you’re pretty adequately reserved?

Stephen R. Crim

I’m sorry I was distracted momentarily at the beginning.

David Lewis – Raymond James

I guess basically what I’m trying to get to is the environmental kind of propped up here in the fourth quarter, are there any more extensive reviews on other pockets of business that you’re monitoring more closely or are you pretty, you say you’re comfortable as of year end but, are there any other areas in the book of business that we should be aware that you’re monitoring more closely?

Stephen R. Crim

Yes. Let me just start out and talk for a minute, even though you’re asking outside of environmental, but let me start with the environmental piece because that’s the area that has created the issues that we talked about on our prepared remarks.

The environmental issues that we’ve had and really exclusively to New York contracted businesses, as we said in our prepared remarks, and the time period that we’re talking about is 2002 to 2006. And if you look historically at our environmental business, it takes four to five years for those claims to be fully developed.

So we believe at this point that we have more emerging claim data than we’ve had in prior years and we’re better able to assess that. I can tell you, at year end we did a more comprehensive review this year than we have in years past by having our internal actuaries spend time with our claims people, going through the individual claims, and trying to identify claims that could have more case reserve development.

So we did a more comprehensive review there. We’re down really to less than 100 open claims in that New York environmental business. As I said in my opening remarks, we have about $26 million of reserves to cover those existing claims and future claims and about 45% of that is the IBNR.

So we’re down to a small amount of premium that we’re in the process of writing off. That’s really a long-winded way of saying we’ve done a lot of work in that particular area, which really has been the single area that has created issues, and we feel comfortable that based on the reserve reviews that we’ve done that we have sufficient reserves up for that.

Now as far as our other business, we haven’t seen any emerging trends that would create any concerns and the other lines of business have been performing as we would have expected. We certainly look at every line at year end. Our more seasoned and bigger lines we spend more time on, but I can say to you that we don’t see any other trends that would compare or even be similar to the environmental that would create any concerns. So, yes, we do believe that we’re adequately reserved.

David Lewis – Raymond James

Steve, maybe give us an update kind of on the Obama impact on tax changes and how that might affect your Bermuda holding company.

Stephen R. Crim

That’s been an issue, as I’m sure you know, that’s been in congress for 20 years and they’ve been kicking this around with no real direction on it. But, having said that, I do believe the Obama administration is more focused on it and there’s an increased likelihood that there will be some kind of a change in the tax code.

The question is, what impact will that have and I’ve got to tell you, there are at least six bills in congress pending that I’m aware of and their sort of all over the map on how they might impact us. So I really don’t know and can’t comment specifically on how that will affect us other than it will have some negative impact on the tax situation.

The only thing I can tell you is this, based on our analysis of the bills that we’ve reviewed thus far it wouldn’t change or impact our strategy going forward.

David Lewis – Raymond James

You have a pretty low tax rate today but you’ve been in Bermuda for some time it wouldn’t be retroactive so probably wouldn’t have a material change in the tax rate based on your current size?

Stephen R. Crim

I think over time it could, again, it depends on the specifics. If there were only one bill or there was one direction I could be more specific, but since there is so many varieties it is hard for me to even speculate where that’s going to go.

But getting back to your point, I don’t expect them to be retroactive. I haven’t seen anything that would suggest that. So to the extent that there were something that could change, I think it would develop over time. It certainly wouldn’t have a major impact immediately, but it would probably have the effect of over time increasing the tax rate. But how much that is I don’t know.

David Lewis – Raymond James

Just on that point again, I’ve talked to some folks in Washington who are maybe a little bit closer to the situation than I am, and they have indicated that this is probably not a high priority given all the other things that the administration is working on. Do you agree with that?

Stephen R. Crim

I know the administration has a lot of things that they’re dealing with. But, as I said at the beginning, this issue has been up and down like a yo-yo for 20 years. Some years it gets more visibility than others but I would say this, that it seems to have more visibility and traction in the current administration than I’ve seen in some time, but time will tell.

David Lewis – Raymond James

One last one and I’ll re-queue. As we look at kind of the $8 million adverse development, reinstatement fees and valuation allowance on reinsurance, if I wanted to figure out the per share impact, what tax rate would you use for that?

Joseph D. Scollo, Jr.

The reinstatement premiums occurred in our U.S. subsidiary so that will be taxed at U.S. rates. The reserve development was primarily in our Bermuda subsidiary and so the valuation allowance also is the U.S. subsidiaries, so only the reserve development was in Bermuda the rest would be taxed at U.S. rates.

Operator

Our next question comes from Ken Billingsley – Signal Hill Group.

Kenneth Billingsley – Signal Hill Group

Just a few questions, one on your assumed reinsurance line, are you seeing your customers looking to increase retention in that space and is that driving some of your shift to an excess of loss or is it from competition? What’s driving some of the change there?

Stephen R. Crim

Well, we haven’t seen a material change in the retentions of the insured’s. I think at this point, given the amount of capital that’s gone out of the market, if anything I think people are looking to preserve capital more. So I don’t really see that as an issue.

What we’re looking at is this, when we’re trying to allocate our capital most effectively, the question is does it make more sense to use or write quota share reinsurance, which has less volatility but uses more capital and the margins are thinner and, as you know, that’s been driving increase in our acquisition costs, or does it make more sense to focus on excess of loss.

We’re certainly writing both, but we’re shifting more of a focus on excess of loss because we think it’s a better use of our capital. And in addition to that Nick Pascall, who is our new Chief Underwriting Officer, that’s primarily what his focus has been historically and he’s bringing new relationships in that will be predominantly focused on that. So that’s really the reason why we’re making that shift.

Kenneth Billingsley – Signal Hill Group

You are not the only one that has commented that you expect there to be less demand in the marketplace through the end of ’09 because of the economy. At what point does the total premium in the industry go down that there starts to create an excess capital division, meaning that very specifically for you. You were talking about 10% to 15% down in gross for ’09.

Stephen R. Crim

It’s hard to answer that. There are a couple of dynamics, first, when you look historically at the leverage ratios for A.M. Best, it used to be that you could write to a higher leverage ratio than you can today. So unfortunately a lot of the capacities driven by what the standards are that A.M. Best puts out.

The other thing that I would say sir that even if premiums come down, which I expect they will, with the amount of volatility in the investment markets, I think there creates enough uncertainty with respect to capital and the fact that there’s no available new capital, I think that puts more pressure on companies. So even with premiums going down, I’m not sure that’s going to create, at least in the near-term, much excess capacity.

Kenneth Billingsley – Signal Hill Group

Last question, just looking into the future, in the past you’ve had some lines that you’ve moved in opportunistically after other people messed up or just with a lot of competition and I’m thinking your construction line, as well as some of the environmental business obviously outside of New York, are there any lines that you guys see now that might create some opportunities and one off opportunities for you to move in for a three to four-year period?

Stephen R. Crim

Well, I would say at this point in time I think that the portfolio products that we’ve built we’re comfortable with, and I think that’s a good platform. And really the plan going forward, we’ll always look for new opportunities as they arise, but really the plan in the short-term is to maximize profitability of those product lines.

I think we’ve got a very leverageable platform. When market conditions improve, I think we can support significant growth in these existing product lines. So really the focus now is, let’s maximize profitability in those lines.

Operator

Our next question comes from Neal Goldman – Goldman Capital.

Neal Goldman – Goldman Capital

In terms of the portfolio, which one, I commend you on getting it down to 3.7 years in the quality of that, but do you expect A, to grow the portfolio this year. B, you said at year end your pre-tax return was 5.5. What’s your sense of the full year average pre-tax return?

William C. Tepe

First of all, on the growth of the portfolio, we do expect the portfolio to increase in 2009. In 2008, we had over $100 million of cash flow from operations, 2009 will be slightly less than that probably into $60 and $70 million range, but we are still expecting the portfolio to grow.

Neal Goldman – Goldman Capital

So that would go up to 730 at year end in round numbers?

William C. Tepe

Yes. Somewhere around there.

Neal Goldman – Goldman Capital

So let’s call it 700 on average, right?

Stephen R. Crim

I would be conservative on that just because with the uncertainty in the market and the fact that our premiums are going down, I would rather be on the conservative side if we’re estimating.

Neal Goldman – Goldman Capital

In terms of the yield pre-tax?

William C. Tepe

Pre-tax just on the fixed maturities, it’s probably going to be somewhere about 4.7%, 4.8%.

Neal Goldman – Goldman Capital

So if you take your overall yield maybe 4.3 for the year.

William C. Tepe

Yes.

Neal Goldman – Goldman Capital

Let’s say on average of 700, right, that gives you 30 million plus in investment income after tax, right?

William C. Tepe

Yes.

Neal Goldman – Goldman Capital

Then when you talk about the gross premiums declining 10 to 15 that would be down to approximately $230 million, is that right?

William C. Tepe

Yes. That should be about right.

Neal Goldman – Goldman Capital

And a combined ratio you said of 100 to 104 so it’s a loss of, let’s say it’s 103, so you’d have an operating loss on the other side of let’s say 3 times 230, what’s that about 7 million, 8 million.

Stephen R. Crim

There are some additional corporate expenses that you have to add on to that.

William C. Tepe

Plus you have to factor in reinsurance. The 230 is [inaudible]. I would just say whatever the earned premiums are going to go up slightly in 2009, so just figure maybe a 5% increase in our premiums and take your numbers off of that.

Neal Goldman – Goldman Capital

So you take 103 on the earned premiums?

William C. Tepe

Yes.

Neal Goldman – Goldman Capital

So if the earned premiums are last year 175 and you’re saying then take a 3% on the 175 is your loss, right?

William C. Tepe

Yes.

Neal Goldman – Goldman Capital

That’s 5 million, and then what’s the corporate overhead on top of that?

William C. Tepe

About $4 million.

Neal Goldman – Goldman Capital

So let’s just say it’s 30 million minus 9 million, okay. Well, the 30 million we said is purchase after tax, right.

William C. Tepe

Yes.

Neal Goldman – Goldman Capital

So essentially we’re earning about $25 million pre-tax or after tax.

William C. Tepe

I’m sorry that’s high.

Neal Goldman – Goldman Capital

Given your numbers, right, because you’re saying it's 103%.

William C. Tepe

The $30 million investment income is pre-tax.

Neal Goldman – Goldman Capital

No. We took it at 4.3, oh okay, we said 4.3 after tax. You’re saying it's pre-tax?

William C. Tepe

Yes.

Neal Goldman – Goldman Capital

So 4.3 times let’s say 700 gives you 30 and then you have that’s 33 and if you’re losing 9 million, not losing, between the combined ratio on less premiums plus the corporate overhead, right?

William C. Tepe

Right

Neal Goldman – Goldman Capital

Then that would be say let’s call it 9 million call it 10 million it’s 20 million, right? And a tax rate of 10% or 12%, what would be your tax rate normally?

Stephen R. Crim

Let’s say 10. So that gets you down to about 18 million.

Neal Goldman – Goldman Capital

Eighteen million divided by what was it, how many shares outstanding now, 11?

Stephen R. Crim

No. About 10.6.

Neal Goldman – Goldman Capital

So the answer is assuming we take a midpoint of a combined ratio and we have that pre-tax 4.3 deals don’t get better, so even with extraordinary short maturity, we end up with round numbers 170 so whether it’s a 160 or it’s 180, that’s an exceptional performance, given this environment.

William C. Tepe

Your conclusion is very reasonable.

Neal Goldman – Goldman Capital

Under the assumptions fees there are no more recurring non-recurring.

William C. Tepe

That’s correct.

Neal Goldman – Goldman Capital

And I’m holding you to that, right?

William C. Tepe

Yes. I’m sure you will.

Neal Goldman – Goldman Capital

So here we are selling again at $9 on 21 42% of book and the book’s going to go up hopefully by let’s call it 150 round numbers, right. Figure 9 divided by 22.5 we’re dealing with 40% of estimated book by the end of calendar ’09 and you’ve got to believe the government’s going to start bailing out at a point in time AIG so the rates will start going up.

William C. Tepe

I hope so, although it’s probably not going to happen this year.

Neal Goldman – Goldman Capital

Are they the primary pressure in terms of rates as far as you can tell? I’ve heard it from other insurance companies that they are, but I just want to know what you’re sense is.

Stephen R. Crim

It’s been a significant factor. A company the size of AIG before this whole debacle started, they were the largest insurance company in the world so the impact that they have is significant on the market. And in the fact that they have received a lot of funds and I can only tell you based on all the intelligence that we’ve received, they have been very aggressive to retain their market share so that’s not helping the insurance market.

And you take that with all the capital that’s been going out, it puts a lot of strain on the insurance industry, which is why I said before, even if premiums go do, I don’t see a lot of excess capacity in the market.

Neal Goldman – Goldman Capital

Unfortunately we’re trying whether it's housing or it's insurance companies or banks we’re preventing from things reaching their normal level. But I think you’re in great shape, now it’s a question of getting the value. Do we have any capacity for buying back stock at this point?

Stephen R. Crim

Neal, I would say no, and I’ll tell you why. My concern is this, we lost a fair amount of capital through the impairment issue in ’08 and given the fact that the investment markets are so volatile, I just think the risk would outweigh the reward at this point. That’s not to say that down the road something might change if we deem that we have excess capacity and we feel that there’s more stability we may rethink that. But as of today, I don’t see it happening.

Neal Goldman – Goldman Capital

Okay. I saw ARGO is now up to 16%.

Stephen R. Crim

I don’t know exactly what the percentage is, but that sounds close. It’s level from where it was.

Operator

Our next question comes from David Lewis – Raymond James.

David Lewis – Raymond James

A couple quick follow-ups, given some of the dislocations in the market and I know some of those players are dealing with higher limit product offering so it may not fully benefit you, but are there any opportunities to pick up from underwriting groups out there in the market?

Are you looking at expanding your product offerings as you have the last couple of years in any particular new areas or just from a high level and maybe comment on that please?

Stephen R. Crim

David, we always keep our eyes and ears open to those opportunities, but I would tell you our focus, as I stated before, is I think we built a great platform that’s very leverageable. While market conditions may not improve significantly in 2009, we’re certainly around the corner from them changing.

So I think our focus is going to be maintaining the discipline that we’ve built building more profitability into our existing lines and trying to leverage those up. So while we’ll keep our eyes open to that, we’re not going to be as aggressive in adding those new pipelines as we have been over the last couple of years.

David Lewis – Raymond James

Bill, do you have a statutory capital and surplus number at the end of 2008?

William C. Tepe

Yes. For our insurance operations there’s about $200 million in the capital and in surplus.

Operator

We have no further questions at this time. I’d like to turn the floor back over to Mr. Stephen Crim for closing comments.

Stephen R. Crim

Just a couple of corporate matters before we hang up, the 10-K will be filed in a timely basis by the March 16th deadline and our next conference call is scheduled for Wednesday, April 29th at 9:00 am eastern daylight time. Thanks for participating on today’s call.

Operator

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

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