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Endurance Specialty Holdings Ltd. (NYSE:ENH)

Q2 2011 Earnings Call

July 27, 2011 8:30 AM ET

Executives

Greg Schroeter – VP, IR and Corporate Development

David Cash – CEO

Michael McGuire – CFO

Mark Silverstein – Chief Investment Officer

Analysts

Amit Kumar – Macquarie Capital Inc.

Darren Marcus – Ticonderoga Securities

Operator

Good day and welcome to the Endurance Specialty Holdings Second Quarter 2011 Earnings Call. Today’s conference is being recorded. During the presentation, you will be in a listen-only mode. Following the presentation, you will be given instructions on how to signal for a question.

At this time, I would like to turn the conference over to the Senior Vice President of Investor Relations and Corporate Development, Mr. Greg Schroeter. Please go ahead, sir.

Greg Schroeter

Thank you, Audra, and welcome to our call. David Cash, Chief Executive Officer; and Mike McGuire, Chief Financial Officer will deliver our prepared remarks. For the question-and-answer portion of our call, joining David and Mike will be Bill Jewett, President; Mike Angelina, Chief Risk Officer; and Mark Silverstein, Chief Investment Officer.

Before turning the call over to David, I’d like to note that certain of the matters that will be discussed here today are forward-looking statements. These statements are based on current plans, estimates, and expectations, include, but are not necessarily limited to, various elements of our strategy, business plans, growth prospects, market conditions, capital management initiatives and information regarding our premiums, loss reserves, expenses and investment portfolio.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the markets in which we operate, the economy and other future conditions, and involve inherent risk and uncertainties.

A number of factors could cause actual results to differ materially from those contained in the forward-looking statements and we therefore caution you against relying on any of these forward-looking statements.

Forward-looking statements are sensitive to many factors including those identified in Endurance’s most recent Annual Report on Form 10-K and quarterly report on Form 10-Q and other documents on file with the SEC that could cause actual results to differ materially from those contained in the forward-looking statements.

Forward-looking statements speak only as of the date on which they are made, and Endurance undertakes no obligation publicly to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise.

In addition, this presentation contains information regarding operating income and other measures that are non-GAAP financial measures. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release, which can be found on our website at www.endurance.bm.

I would now like to turn the call over to David cash.

David Cash

Thank you, Greg. Good morning and welcome to our call. Although our second quarter results were impacted by catastrophe losses, we’re pleased with our performance on a number of fronts. Our diluted book value per share grew 1.3% in the quarter and stands at $52.20, after adding back dividends paid, book value per share is up 11.6% over mid-year 2010.

The company posted a combined ratio of 101.9% for the quarter. This number included 12.8 percentage points of catastrophe losses. Year-over-year written premiums were relatively flat with a 2.7% increase in gross premiums and a 2% decrease in net premiums. We experienced rate driven increases in our Bermuda catastrophe book rate and exposure driven increases in our international reinsurance business and policy count in premium growth in our U.S. Contract Binding Authority insurance business.

Finally, our balance sheet continues to perform well with our short and long tail reserves showing their respective strength in the quarter and our investment portfolio producing a total return of 1.3% for the quarter. Later in the call, I will provide some commentary on the performance for the quarter as well as some thoughts on market conditions and our positioning for the balance of this year.

With that I will hand the call over to Mike McGuire who will review our financial results in more detail.

Michael McGuire

Thanks, David, and good morning everyone. For the second quarter, we generated net income of $41.1 million and $0.87 per diluted share. Our operating income for the second quarter was $24.5 million and $0.48 per diluted share. Our second quarter net premiums written were $441.8 million, down about 2% over the same period in 2010.

Within our insurance segment, net written premiums decline $21.5 million or 11% from the second quarter of 2010, largely due to premium declines and property and professional lines with some offset from growth in casualty. In both our property and professional lines of insurance, business conditions remain competitive and we let policies go.

In casualty, growth from our recently launched small risk Contract Binding Authority Unit was partially offset by declines in large risk excess casualty insurance, where the market remains competitive.

Within the Reinsurance segment, net premiums written were up $12.4 million or 4.9% from the second quarter of 2010, driven by strong renewals and price improvements in our catastrophe business and favorable premium adjustments in our property lines, partially offset by decline in casualty reinsurance premiums from several non-renewals due to pricing, terms and conditions.

Endurance’s combined ratio was 101.9% in the second quarter of 2011, compared to 91% reported in the second quarter a year ago. The increase year-over-year was driven primarily by $61.8 million of net catastrophe losses in our reinsurance business, which added 12.8 points to our overall combined ratio.

In addition, we saw higher losses this year in our agriculture insurance business, which added about four points to our overall combined ratio. These increases were partially offset by 2.7 points of additional favorable reserve development year-over-year.

Within the Reinsurance segment, the combined ratio was 106.4% in the second quarter, up 18.5 points from the second quarter of 2010. This increase was driven primarily by U.S. tornado losses, which added 26.5 points to the Reinsurance segment combined ratio. In contrast, catastrophe losses incurred in the second quarter of 2010 were relatively modest.

Within the insurance segment, the combined ratio was 97.6%, up 3.5 points from the second quarter of 2010. The increase was driven by higher 2011 accident year loss ratios in agriculture and property insurance, which were largely offset by higher levels of favorable prior reserve development in our agriculture business.

In our agriculture line, higher current year loss ratios were due to the excess moisture in the Midwest United States in the spring, which led to some prevented planting reserves and from the continued severe drought in the southwestern United States, particularly in Texas. Even with these challenges in our agriculture line of business the current accident results were still profitable this quarter.

Moving to investments, our portfolio’s total return was 1.32% in the quarter. Net investment income was higher than the second quarter of 2010, largely due to improved returns in our other investments.

Our fixed maturity portfolio market yield of 2.18% was modestly lower year-over-year. However, the drop in yield was partially offset by a larger portfolio balance. Our portfolio duration remained short at 2.3 years due to our continued concerns about the risk reward related to interest rate risk. The book yield in our portfolio ended the quarter at 2.93%.

During the second quarter, we opportunistically sold some investments to lock in gains and reinvested the proceeds in shorter maturity assets, which lowered our overall duration. We also continued to strategically invest small amounts in equities and other investments to further diversify our portfolio.

Our loss reserves continue to be strong with $490.7 million of IBNR for short tailed lines, held as of quarter end. Excluding reserves for named catastrophes, our short tailed IBNR for the 2011 accident year ended the quarter at $106.5 million. In addition, $1.9 billion or 74% of our long tailed reserves are IBNR. We continue to have an exceptionally strong balance sheet, with total shareholders’ equity of $2.7 billion and total capital of $3.2 billion.

In the second quarter, we issued $230 million of perpetual preferred shares at a 7.5% coupon. This is an efficient form of long-term capital and it further strengthens our position for the balance of the year and into 2012.

Lastly, during the month of July, we were able to execute cost effective commodity price hedges related to the corn and soy exposures in our agriculture business. For a very modest outlay of option premium, we have significantly reduced our exposure to price reductions in corn and soy should they occur at harvest time.

With that, I’ll turn the call back to David for some additional comments and concluding remarks.

David Cash

Thank you, Mike. I’ll now take some time to review the following areas. Current underwriting conditions, recent catastrophe losses and PMLs, current crop growing conditions and capital management.

Turning to underwriting conditions, we’re seeing price increases in select portions of our portfolio. These increases were encouraging, but at the same time, not so widespread they should be read as a market turn. In our property and catastrophe reinsurance businesses, we’ve continued to see price increases through the second quarter and into the third quarter.

At April 1, pricing for Asian-Pacific catastrophe risks was up materially. Japan saw 50% rate increases for catastrophe risks and more recently, Australasian risks priced up by similar amounts. These rate increases contributed meaningfully to our growth in Q2 written premiums.

In the U.S., it’s 6/1 and 7/1 wind exposed risks, particularly those that might have experienced tornado losses saw rate increases of 10% to 30%. Our sense is that these rate increases have the potential to be replicated by January 1 of next year. Casualty exposed reinsurance business remains thinly priced and to that end our casualty reinsurance portfolio shrank this quarter.

Turning to insurance, market conditions remain challenging and the general theme is one of our market bottoming out. In the casualty insurance classes, there are some signs of price increases. In the smaller primary casualty classes, we have experienced price increases for some months now. This is particularly true from our smallest commercial classes of risks and is beginning to be evident in few other places in our portfolio as well.

For larger commercial business, prices are mixed. We do see price increases in some more hazardous classes of risk, however these increases are more often but not matched by price reductions in other less hazardous classes.

Overall, it feels to us like the casualty market is trying to turn the corner on price. Realistically, I suspect that we are a good way from experiencing material price increases in the casualty market. With that said, this is an important shift in psychology for us all.

Since January 1 of 2010, we’ve seen an excess of $50 billion in reported industry losses. Given the significant losses that have occurred, it’s gratifying to say that Endurance’s book value per share plus dividends has grown 20% over that same period of time.

In the second quarter, Endurance experienced U.S. tornado losses. In the Midwest, where Endurance is a significant re-insurer of regional insurers, Endurance experienced approximately $62 million in tornado losses. The most material of these losses, approximately $50 million, came from the string of tornadoes, which struck at end of April.

Separate from the tornadoes, the Midwest also saw flooding in the second quarter. These floods were similar in magnitude to the flood seen in Q2 of 2008, and while large, did little damage to our insurance clients outside of our crop insurance business.

Our loss reserve estimates for prior period catastrophe events were largely unchanged in the quarter. Overall, we feel very comfortable with respect to the performance and positioning of our catastrophe portfolio.

You will note that this quarter, we’ve enhanced our risk disclosure, and you will see in our financial supplement that we’ve included detailed PMLs for our major regions and perils. We’re still in the process of rolling up our July 1 PMLs, both in RMS 10.0 and 11.0. And as soon as that is complete, we will release both sets of numbers.

The key takeaways from this exhibit are reasonably straightforward. We write a global balanced book of catastrophe business with the skew towards those zones where pricing is strongest and a measured approach to those zones that are least easy to model.

Beyond our portfolio weighting, we feel we do a good job of measuring our absolute exposure to events. And over the last four years, we’ve seen actual catastrophe events emerge in line with our model PMLs. We hope this extra level of information is helpful to our investors and please keep an eye open for the 7/1 numbers that will be released shortly.

Turning to our crop insurance operation, 2011 has been a mixed year for the business. Over the first six months of the year, we experienced significant positive loss emergence from the 2010 crop year. At the same time, we’ve booked the 2011 crop year at slightly better than breakeven.

This cautious approach to booking the 2011 year reflects the challenging growing conditions being experienced in the Southwest, in particular, Texas. Where there is a potential for loss to emerge, current growing conditions outside Texas – while there is a potential for losses to emerge, current growing conditions outside Texas are strong enough that we should not at all discount the potential for profits in our crop business once again this year.

As of today, almost all states are showing strong underwriting margins, the exceptions are Indiana, where we have a good sized block of prevented planting case reserves, and Texas where we have losses on the winter wheat harvest and case reserves for the spring crop losses.

Given what we already know about planting in Indiana and the drought in Texas, it is possible that we will see replanted crops realized in Indiana, potentially reducing losses for that state, as well as the potential for incremental harvest time losses in Texas.

In considering these two possibilities, it’s important to note that the profit and loss sharing ratios for Indiana and Texas are quite different. In Indiana, every incremental dollar of gross profit is shared with $0.75 going to the company and $0.25 going to the FCIC.

In contrast, in Texas, because of our FCIC session strategy and the losses we have already incurred, every extra dollar of gross loss is shared with approximately $0.13 going to the company and $0.87 going to that FCIC. As a consequence of this asymmetric profit and loss sharing engagement, Endurance is relatively insulated from additional loss emergence from the drought in Texas and will benefit to a greater extent in Indiana in the event that the replanted crops are ultimately harvested and the prevented planting case reserves are subsequently reduced.

It is still too early to predict with certainly our crop insurance results for the 2011 crop year, however we believe we’ve done a sensible job of managing our downside risk to the FCIC reinsurance plan. And at the same time, we have plenty of opportunity to benefit from the potentially strong harvest outside of Texas.

The final area I’d like to comment on is at a capital management. Since January of this year, Endurance has been very active in terms of managing its capital position. On January 24, Endurance repurchased approximately $320 million of common equity. And more recently, on May 24, the company issued $230 million of perpetual preferred shares at 7.5% coupon. These adjustments to our capital base increased our diluted book value per share and reduced our overall cost of capital, and leave our overall rating agency capital position only modestly change from December 31 of last year.

After reflecting these two capital management transactions, Endurance today has total shareholders’ equity of $2.7 billion and total capitalization of $3.2 billion. We believe this level of capitalization is more than ample for the market we see today. And when you combine this capitalization with our strong risk management performance, it’s clear that Endurance is well positioned to handle both the risks and the opportunities that may come our way.

With that, Audra, I would now like to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first to Amit Kumar at Macquarie.

Amit Kumar – Macquarie Capital Inc.

Thanks, and good morning, and congrats on the quarter. Just maybe starting with the comments you made on the price hedges. Can you just expand a bit more on those hedges which are in place right now?

Michael McGuire

Sure, Amit. It’s Mike McGuire. This is an area that we’ve been looking at for some time. As we’ve said previously, a meaningful part of our exposure to our revenue contracts in our crop insurance business is driven by changes in commodity prices. And we’ve been looking for some time at cost-effective ways to mitigate that risk. And with the passage of time and with the trading that we’ve seen in the commodity markets, we did see an opportunity to put a few – essentially derivative contracts on the books that would mitigate our downside potential, if prices were to go down below base prices.

It’s important to note for our corn and our soybean exposures, farmers generally buy revenue protection that would start to kick in, if prices would decline, say, 15% to 20% below the base prices that were established back in the spring. And the hedges that we’ve been able to execute, they’re essentially very straightforward over-the-counter put options for corn and for soy that would be targeted to the December future prices during the month of October, which would line up really exactly with where our underlying policy exposures would be priced.

Amit Kumar – Macquarie Capital Inc.

And is it a one is to one match with your corn and soybean book?

Michael McGuire

It’s very close. You can never get a perfect match. But really what we’ve done is really insulated the portfolio, so to the extent that we did see prices on corn or soy to go down, say, 15% to 20%, that’s when we would really start to see revenue losses start to come into the portfolio. That’s exactly the point where these hedges would then start to respond in terms of positive valuation.

So, through most return scenarios, we would see that generally offsetting. And more interestingly, as you get down into the tail in terms of price reduction, you’d actually see a very significant value increase coming from the hedges that we put into place that would more than offset some of the revenue declines from price that would be seen, say, if prices were down 15%.

Amit Kumar – Macquarie Capital Inc.

Okay.

Michael McGuire

So, very cost-effective way for us. In terms of cost, we paid option premiums of a few million dollars.

Amit Kumar – Macquarie Capital Inc.

Got it. And in terms of understanding the metrics, you mentioned $463 million, I think, a premium number. You’ve earned close to $200 million of that in the first half, which leaves roughly $260 million. Based on what you’re saying, if I hit that, let’s say, an 88% loss ratio and 8% expense ratio, you get 4% of underwriting margin. And if you multiply those, you get roughly $10 million of underwriting profit. Is that the right way to look at it? And how would it be skewed in terms of timing? Does that come in Q3 or probably Q4?

Michael McGuire

Well, there is a number of things that you raised there. Yeah. I assume that you’re speaking specifically about our agriculture insurance business.

Amit Kumar – Macquarie Capital Inc.

Yes, yes.

Michael McGuire

Okay. Where we booked our agriculture business in the quarter was at about a 96ish percent combined ratio, 96% to 97% combined ratio. So, if I understood your comment correctly, it sounds like we’re – you’re in the ballpark in terms of where we booked our actual year results for our crop business.

Amit Kumar – Macquarie Capital Inc.

Got it, okay.

Michael McGuire

And if I think into the back half of the year, to the extent that we have reasonable harvest coming out of the Midwest, there is a potential that that could improve. But obviously, there is a lot of time between now and harvest.

Amit Kumar – Macquarie Capital Inc.

Got it. And I’m sorry, why didn’t – why weren’t the hedges bought for cotton? Can you talk about that? Why was it only for corn and soy?

Michael McGuire

Sure. Yeah, the revenue protections in place in our crop insurance business are a functional of both yield and price. And this year, unfortunately, the story for cotton, it’s all about the yield. And really what our results would reflect, would already reflect very significant yield losses. So, the exposure to further price declines in terms of impacting revenues for our crop insurance policy on cotton is relatively modest.

David Cash

Maybe, just going to step in, we’re booking Texas today on a gross basis, at a 160% loss ratio. And then the FCIC arrangements for reinsurance allow us to buy reinsurance on that. So, it reduces the net loss ratio significantly. The important thing to note is under the reinsurance arrangement, if the loss ratio goes beyond to 160%, the loss sharing ratio with the FCIC is very generous. For assigned risks, which are probably two-thirds of our portfolio, $0.94 of every dollar of incremental loss goes to the federal government, $0.06 of every dollar stay with us. For non-assigned risks, for commercial fund losses, it would be $0.80 go to the federal government, $0.20 stay with us. And so, Mike’s point is even if things get worse, be it for yield or for that matter we’ll call it cotton price, that impact on us is very attenuated.

The other piece of the puzzles was when you look at corn, farmers tend to buy attachments that are further out of the money, and so typically you start to see revenue losses when you have 40% – 45% reductions in the price of cotton, sorry, to be clear. And if I were a betting man this year, and I guess this goes unavoidably, we’re all sort of betters in some ways in this business, given what we’re seeing in Texas, I think cotton probably will see price increases rather than decreases, as we move towards the end of the season.

Amit Kumar – Macquarie Capital Inc.

Got it. And then just –and appreciate all that. Just one more question and I’ll re-queue. In terms of the new disclosure on PML which is quite helpful, you mentioned that soon you’ll have the updated numbers. Approximately how much do you think those numbers will shift? Your 1-in-100 is 21.2% – I think as of RMS 9 or 10. How far does that number go up based on RMS 11 and based on your current book? Thanks.

David Cash

Sure. We do actually have a little bit of insight into where we’re at 7/1 using RMS 10.0. And if we just focus our comments on U.S. wind which is really where the model change is taking place but also where some of our exposure shifts have occurred. At 7/1 under 10.0 we would expect our hundred year PML for wind – U.S. wind to come down by about $40 million. And then as we layer in 11.0 between now and the end of the year, then we’ll (inaudible) much sooner than that, I would expect that the PML would then rise from that lower level by something like $50 million to $100 million is where we’d put it.

And so we will be up from the beginning of the year somewhere north of $50 million on that PML. And that obviously that PML number has a direct impact on your capital levels, the amount of capital that you need to hold. And today, versus A.M. Best and S&P, we hold between $500 million and $700 million of capital excess to what they ask us to hold. And that’s anywhere from $100 million to $200 million, $300 million in excess of what we’d normally seek to hold sort of a buffered position. And so when we look at the layering in of 11.0, it reduces our sort of overall level of capitalization versus rating agencies, but leaves us sort of in a comfortable position in terms of renewing our book of business.

Amit Kumar – Macquarie Capital Inc.

Got it. Okay thanks, thanks and congrats on the quarter.

Michael McGuire

Thank you.

David Cash

Yep.

Operator

(Operator Instructions)

David Cash

Okay.

Operator

And we do have a question that has queued up from Darren Marcus with Ticonderoga Securities.

Darren Marcus – Ticonderoga Securities

Hi. Good morning. Just curious there was a lot of moving parts in the crop insurance business obviously, and I was wondering if you could talk about possible best and worst case scenarios for the remainder of the year seeing this drought conditions persist et cetera in all different exposures across all the states?

David Cash

I mean it’s a little hard to sort of offer every different number. I think the way I would look at it today is if you look at a state like Indiana which we mentioned earlier, early in the season they had significant floods and that caused farmers to submit prevented planting claims, which is their way of saying we’re not sure we can get a crop in the ground we may have a complete loss on the year.

And as a result of those submissions we are carrying now about a $40 million reserve on those prevented planting claims. The farmers, as he work to the backend of the year, actually do get crops in the ground and ultimately withdraw the prevented planting claims (inaudible). And as of today, on that $40 million of reserves, we’ve only paid $40,000 worth of claims there. And so there’s a very real chance that Indiana will have just a normal year for us. And we don’t get sort of dollar for dollar benefit from that, but that would have a meaningful potential to increase our overall return for the year.

On the other hand if you look at (inaudible) we call the down side, in Texas, where we’ve experienced another $100 million worth of harvest time losses on the book on a gross basis, we would share anywhere between 6% and 20% of that ourselves. And on a blended basis is sort of between 10% and 13%. And so those – you get a sense as to how hard it is to really jump out of the box and have sort of an extreme upside or an extreme downside event. There are obviously a lot of different states that need to be seen and I can tell you that we’re at the stage right now where numbers move around quite a bit. A week ago we were still carrying some losses on our North Dakota book of business and this again was sort of prevented planting claims. And just over a seven-day period that loss reversed itself entirely. It was a $5 million loss we were carrying in our numbers it’s now a $5 million gain. So I don’t want to sort of over predict what can happen in the future. That gives you a sense of sort of the range that we can operate with.

Darren Marcus – Ticonderoga Securities

Okay great. Thanks a lot.

David Cash

You’re welcome.

Operator

And we’ll take a follow-up from Amit Kumar at Macquarie.

Amit Kumar – Macquarie Capital Inc.

Thanks. Just a few other things which I wanted to (inaudible). In terms of preferred offering, your document states that the use would be corporate purposes, repayment – repurchase of outstanding debt. Can you sort of just walk us through what your top priority is with that capital raise?

Michael McGuire

Sure, Amit. I’ll start and I think David will probably jump in as well. One thing that’s common on the preferred market is it can be a very fickle market. And it is also a security and a part of the capital position that is a very attractive one for modest debt like cost you have essentially long-term equity in terms of capital treatment (inaudible) the rating agencies.

So when we saw the window of opportunity open in the preferred markets, we took that opportunity and raised the $230 million. We do have some near to medium term senior note maturities. We have a 2015 senior note that is up for maturity coming in 2015 to the extent that we see opportunities over the next few years to start taking that down. We would certainly do that. That also puts our capital position at a very, very strong level in a year that is pretty challenging from a catastrophe loss point of view for the industry, and I think sets us up and gives us that extra capacity to the extent that we see continued improvements. David I don’t know if you have further comments there?

David Cash

The – in terms of the hierarchy, obviously if we can deploy our capital for underwriting purposes we would do that. And if we can’t then we would essentially hold that. I wouldn’t see us buying back stock this year. I don’t think that is the priority. If you look at just the opportunities to grow, think on the wind side rates will be pushing upwards at January 1. And we certainly see that it as an opportunity to increase our exposure to we call it the regional clients who historically likes that would be a first priority. If the rates were very strong then we would be seeking to grow at sort of across-the-board on the wind side. And so underwriting first, then we would essentially hold it. I don’t think there’d be many people that would be buying back stock at the moment.

Amit Kumar – Macquarie Capital Inc.

Got it. That makes sense. And then two sort of other cleanup questions, you mentioned premium adjustments and maybe I missed that number, did you give that number? And what exactly is that number?

Michael McGuire

I didn’t give the number in my comments but it’s about a $10 million number.

David Cash

And this is on reinsurance contracts.

Amit Kumar – Macquarie Capital Inc.

Yes.

David Cash

Where the client essentially at the beginning of the contract predicts the premium they will write during the 12 month period. And as the 12 month passes, the actual premium can differ from what they predicted, and so those then become premium adjustments. And that’s what was being recorded there.

Amit Kumar – Macquarie Capital Inc.

And this is sort of a one-time, none of this would repeat in Q3, right?

Michael McGuire

We adjust our premiums every quarter. And as we get actual information, we’ll make adjustments. I think you can see over time, when we had adjustments, they’ve generally been positive adjustments. But I think we do a decent job of estimating our premiums with a prudent bias to establishing those estimates.

David Cash

What tends to happens is premium adjustments occur towards the end of a reinsurance treaty period as you’re about to renew it, and so we have some significant treaties that renew at midyear so there are naturally sort of adjustments there. We don’t have a lot of significant treaties that renew at the end of the third quarter. So unlikely in the third quarter, but possibly in the fourth quarter though.

Amit Kumar – Macquarie Capital Inc.

Okay, that’s helpful. And final question, in terms of other investments, $1.1 million this quarter versus $14 million in Q1 and a loss of $7 million in Q2 2010. Can you remind us what the breakup – the breakdown between alternative and the high yield bank loan funds is? And has that allocation changed this quarter or is it still the same? Thanks.

Mark Silverstein

Hi. This is Mark Silverstein. On the other investments, about a third of it is bank loan funds. And that’s been the case for quite a while now several years. And then the other half is hedge funds and about half of it is credit/distressed funds and half of it is more opportunistic multi-sector funds. And that’s been fairly constant over time. The one thing we’ve done is added a little bit on the, what I would call distressed (inaudible) residential and commercial loans. And that’s an opportunity that’s become more available over the past year or two. And we’ve added a little bit of that to the portfolio.

And the performance has been as you mentioned, some quarters, most quarters it’s positive, a few quarters it’s been negative. And that goes with the volatility of the market. And in the second quarter of this year and in the second quarter of 2010 the sovereign debt crisis mainly in Europe caused volatility in the markets and the returns to be lower. But over time, the performance in that portfolio has been pretty strong. It’s been about 4% greater than the S&P per year since we started the program and about 40% cumulatively greater with about half the volatility. So it’s been a pretty effective way to add return with reasonable volatility.

Amit Kumar – Macquarie Capital Inc.

And who’s managing that again for you?

Mark Silverstein

We have a number of different hedge fund managers that that money is then put with a number of hedge funds. We don’t use fund to fund, everything is direct. And it’s reasonably diversified portfolio. But not overly diversified.

Amit Kumar – Macquarie Capital Inc.

Okay. That’s very helpful. Thanks for all the answers. I’ll stop here. Thanks.

David Cash

Thank you, Amit. Yep.

Operator

And that does conclude today’s Q&A session. I’ll turn the conference back to David Cash for any closing remarks.

David Cash

Thank you. Thank you again for joining us today on our earnings call. Looking towards the rest of the quarter, we’ll be meeting with investors at the KBW and Macquarie conferences in September. We look forward to seeing you and talking to you again next quarter. Thank you.

Operator

And that does conclude today’s conference. Again thank you for your participation.

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