Flagstone Reinsurance Q4 2007 Earnings Call Transcript

Flagstone Reinsurance Holdings Limited (FSR)

Q4 2007 Earnings Call

February 19, 2008 9:30 am ET

Executives

Brenton Slade – Investor Relations Officer

Mark J. Byrne – Executive Chairman

David A. Brown – Chief Executive Officer

James O’Shaughnessy – Chief Financial Officer

Analysts

Joshua Shanker – Citi

Jay Gelb – Lehman Brothers

Ian Gutterman – Adage Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to Flagstone Reinsurance Holdings fourth quarter 2007 earnings conference call. My name is Grace Ann and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today’s conference. As a reminder this call is being recorded for replay purposes. It is now my pleasure to introduce you to your host for today’s conference, Brenton Slade Flagstone’s Investor Relations Officer. Brent, please proceed.

Brenton Slade

Good morning ladies and gentlemen. Thank you all for joining us on the call today. With me today is our Chairman Mark Byrne, David Brown our CEO and James O’Shaughnessy our CFO. Before I turn the call over to Mark please let me remind everyone the statements made during this call including the questions and answers, which are not historical facts, maybe forward-looking statements within the meaning of the US Federal Securities laws. Forward-looking statements contained in this presentation may differ from actual results. We therefore caution that you should not place undue reliance on such statements. We speak only as of the dates on which the statements are made and the company undertakes no obligations to update or revise publicly any forward-looking statement whether as a result of new information, future events or otherwise. With those pleasantries aside I’d like now to turn the call over to Mark Byrne our Chairman, Mark.

Mark J. Byrne

Good morning ladies and gentlemen. On the organizational front we continue to build our global platform in the fourth quarter. We added additional staff and expertise to our Puerto Rico operation as well as our Dubai branch, Switzerland continues to build-out as well. Adding this new talent to our already considerable professional pool we feel we have the resources to truly change the business. Our goal for building this platform is two-fold. First, to have a large talent pool in efficient locations top provide an industry leading analytical quantitative infrastructure as well as great service to our clients. Second, the source business that would not make its way to major markets like Bermuda and London.

On the investment portfolio the quarter reproduced a return to our expectations . For the full year the US dollar portfolio returned 7.4% and the overall portfolio, including our Swiss Franc assets base 7.02% composite versus 7.28% for our index. We think that’s a nice start to our medium return low volatility investment strategy. Our investment portfolio total return for the quarter which includes realized and unrealized gains and losses was 1.35% we balanced our portfolio in the second half of December to reflect moderately relaxed constraints on emerging markets equities and commodities by A.M Best. The new allocation still keep the high grade fixed income component similar to previous levels but achieve a better diversity among the other asset classes. Strength and commodities, falling interest rates and emerging market equities offset by poor performance of the US equity markets net positively impacted the return of portfolio in the fourth quarter. The duration of our fixed income portfolio remains low at about two years which we continue to feel comfortable with from a risk reward prospective and we remain conservatively positioned with an average credit quality of AA+.

We had no exposure to sub-primes or CDOs of Sub-prime, but if one starts to think about the sky falling you have to look at what the indirect exposures could be. Our exposure to traditional monoline insurers for example M&As from other non sub-prime asset backed holdings, which are guaranteed by monolines. We have securities like that with credit enhancements from traditional monoline insurers amounting to $7.8 million market value a year end . We don’t have any CLO or CDO exposures in the portfolio. As of December 31, 2007 the risk portfolio consisted of 23% equities, 68% bonds and cash, and 8.5% other assets including alternatives and commodities for a total of 100.

Looking back at 2007, just to take a look at the year as a whole, we’re very proud of our accomplishments during the year. First and foremost we were able to once again meet our target of 17% growth and diluted book value since the formation our diluted book value has grown at 19% on an annualized basis. We view that as entirely satisfactory, however, it’s the organization that went through the most significant growth and change, we started the year with 100 people we now have about 250. The primary goal of developing our human resources, this primary bet that we’re making is that by having more resource in other firms, we’ll be able to make smarter decisions. We think smart people matter and more smart people is better. We think we can lower our loss ratio over time by doing more work on evaluated risks than others are able to do. While the many offices have multiple purposes, the theme of trying to apply more and better resources to the business than we could ever assemble in Bermuda is predominantly reflected in our large Halifax, Martigny, Switzerland, and Hyderabad, India offices. You’ve heard these numbers before, but today we’ve employ 10 actuaries , 10 PhD $, 69 people with masters degree among our 255 total staff. We don’t think you can find firms, even several times our size with numbers like those.

The second theme for our global platform is small offices dedicated to marketing or local underwriting. We have these now in London, Zurich, San Juan and Dubai with Mumbai on the way. We are serious about building the most diversified book of business possible and we don’t believe that can be done sitting in Bermuda waiting for the doorbell to ring. This development of small regional marketing offices is more than half complete now and we’d be happy to discuss how we chose those places if someone cares to bring that up during the question and answer session.

The third element of our global platform is to source business from controlled affiliates in the insurance business via quota share. This is place for us in the Caribbean via Island Heritage and we also have a significant quotas share and strategic relationship with a company in South Africa, Imperial Rate. You can expect to see further developments along this line in regions where pricing is adequate and we feel our technical skill base can create an edge. In April 2007 we were pleased to be the first 2005 company in a position to go public on a major exchange. This event signaled our arrival as a mature and trusted reinsurer and enabled us to do more business with our key clients. In 2008 we expect to create a shelf capability for equity in that further enhancing future financing flexibility. During 2007 we also further optimized our capital structure with the issuance of hybrid debt and the issue of restructured excess side car, a private CAP fund if you will. We looked at these transactions as proof that we are able to use the great financial stills we have at Flagstone to optimize our capital and we have the ability to engineer unique solutions for capital markets clients. Rather than having a fixed side car, we view side cars as a business and we have renewed upwards of 90% of our 2007 side car capital into 2008. We’re constantly looking at new ideas and structures to help our clients and ways to offer innovative products to investors.

Recently we were part of history by transacting the first two CME windstorm futures on the cargo hurricane index. The convergence of insurance and financial markets will not leave Flagstone behind.

On the strategic front we continue to see significant deal flow and M&A opportunities, I’m beginning to sound like a broken record but we did not see anything large that met our criteria for acquisition . I consider it a central part of my job to evaluate external opportunities, but we have so far only demonstrated solidly our ability to say no. Should opportunities arise that improves the prospects for you as our shareholder, we will engage seriously and we do know how to close a deal. With that overview, I will turn the call over to David.

David A. Brown

Good morning everybody. The fourth quarter produced nice results in line with our expectations. We wrote $54 million in premium for the quarter, excluding Island Heritage, as compared to $26 million in the same quarter last year. For the full year of 2007 we wrote gross premiums of $544 million, again excluding Island Heritage, as compared to $302 million in 2006. To break down the premium a bit we wrote $31 million of property caps, $18 million of other property, and $16 million of specialty. For the year premiums written were $411 million of property cap, $94 million of other property, and $71 million of specialty. This premium level and growth in premiums is pleasing although we continue to emphasize we do not have any premium targets or budgets and concentrate solely on attractive margin business. While bearing this mind, we’ve very comfortable with the book a business we’ve selected and the conservative level of risk that we run. As an example of this our 1 in 100 pml was $350 million and our 1 in 250 pml was $387 million as of December 31, 2007. Also pleasing this year was the continued growth of the specialty book in the fourth quarter as we continue to diversify our lines of business.

As I mentioned earlier we have so far excluded Island Heritage from our premium analysis in order to provide investors with a clearer comparison between this year and last. However, in 2008 and beyond the impact of our strategic stakes in that company will be reflected in an increase flow premium from Island Heritage to Flagstone as we modify their reinsurance structure to produce a more up flow result for both Island Heritage and Flagstone. During the fourth quarter we did experience some loss activity with $30 million of losses, mostly attributable to the California wildfires, Sydney hailstorms and the Paris satellite failures. Despite these losses, our loss ratio of 24.3% which we consider a favorable result. As we’ve mentioned in the past, we’ve worked very diligently at diversifying globally to create a balanced portfolio. We believe this approach will prove itself over time by helping us achieve our target rate of return while limiting downside. Ultimately this approach will take some of the volatility out of a typical catastrophe book. For the full year 2007 we incurred gross losses of $193 million equating to a lost ration of 40%. This result validated our diversified approach, as outside of the US there was a significant amount of large catastrophe activity. Due to our low penetration internationally, we do expect to participate in losses as they occur around the world.

Since the renewals of January 1^st we are very pleased to see that we were able to gain increased shares on our existing client programs as well as to bring several new relationships to fruition. Conversely, we’ve dropped some business in instances where pricings and or terms failed to meet our standards. This is particularly the case with quota share business where we non renewed three significant contracts both because terms weren’t attractive and because we had opportunities to deploy capacities in higher margins excess of loss contracts. We do pride ourselves that our global platform lets us quote all major lines of our business and deliver fast turnaround to our clients. Due to this capability and our strong credit worthiness, we were given the chance in many instances to deploy large amounts of capacity in private transactions where we received non concurrent terms and we found that our margins benefited. These private placements particularly in the international book shows the advanced state of our recognition and reputation in the market.

Last year we invested heavily in building our team in Switzerland, which is the center of our specialty underwriting business. This year that investment has paid dividends which a substantial increase by the business written by that office, we expect that growth to continue. Late in 2007 we opened and staffed new offices to Dubai to serve the [inaudible] region and Puerto Rico to serve the Caribbean and Central and Latin American markets. We have already seen significant activity through these offices and expect to see business growth through them, in particular through January 1, 2009. But just like our experience in Europe, we know that this will not provide instant gratification. We know that building a business organically is slower, but we believe it is ultimately safer and cheaper than building by acquisition.

Pricing has softened since 2007, but overall we believe we are participating in the best price segment of the reinsurance industry and rates are still attractive on a risk adjusted basis. We use our extensive and sophisticated suite of pricing and risk management tools to constantly review and optimize our portfolio. The result of this is that we believe our risk adjusted rates on line are down significantly less than the industry. With that I’ll pass the mic on to James to discuss the financials.

James O’Shaughnessy

Good morning everyone. Let me take you through the key financial highlights for the fourth quarter of 2007. As Mark noted our long term financial objective is to maximize growth in diluted book value per share. We began the quarter with a diluted book value per share of 13.30 and we grew this to 13.87 by the end of December which translates into a total return of 4.6% for the quarter and 16.8% for the year, inclusive of dividends. The current quarter’s net income is $51.4 million and net income for Q4 2006 was $63.6 million. On a full year basis we generated net income of $167.9 million compared to $152.3 million for the full year 2006. Gross premiums written were $65.1 million for the quarter a 145.5% increase over the same quarter last year. Growth was primarily due to two reasons: increase participation on programs from our existing clients; and the additional of new clients due to a larger capital base and growth in our franchise. And, secondly the acquisition of the controlling interest in Island Heritage in July 2007 which resulted in the inclusion of $11 million in gross premiums for the quarter. Our seated premiums are purchased based on our underwriter’s judgments to optimize the risk profile of the portfolio which can cause premiums seated to vary as a proportion to gross writings from quarter-to-quarter. Retro purchases this quarter primarily related to Island Heritage in the amount of $7.3 million. Net earned premiums were up $52.9 million compared to the same quarter last year. Because Flagstone only began writing business in January 2006, on premium volumes that continue to increase, earned premiums lagged noticeably behind written premiums. Our net premiums written and earned since inception are $809 million and $669.2 million respectively, a difference of $140 million.

Turning to the subject of losses for the quarter we generated loss ratio of 24.3% including $11.4 million losses from the Sydney hail storm that occurred in December, $7.8 million for satellite losses, and $7 million for the California wildfires. To determine Flagstones loss assessments for these events we utilized both a market share approach as well as estimates from our [inaudible]. Note we have not failed to reserve a release of $9.1 million related to windstorm Carol, June and July UK floods and New South Wales flood losses. Our paid losses for the quarter were $10.6 million. Note our approach to quarterly reserving remains disciplined and conservative, consistent since our inception. The acquisitions rate was up from the prior year quarter due mainly to an increase in profit commission related to the positive financial performance in certain proportional contracts and increase in the proportional business written in this quarter which generally have a higher acquisition cost than excessive loss business.

Our operation expenses of $24 million for the fourth quarter are in line with expectations give the growth in operating platform and additions to headcount in Q3 and Q4 2007. We’re pleased with the combined ratio of 64% and 73% that we generated for the quarter and full year. We finished the quarter with shareholders equity of $1.5 billion and total asset of $2.1 billion. With that summary of the financial I’ll pass it back to the moderator to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Joshua Shanker of Citi, please proceed sir.

Joshua Shanker – Citi

The first question I have regards the renewal fees, when you went and started writing new contracts, how well received was the Flagstone name and ratings compared with one year ago, particularly as it involves casualty business, but also in terms of property? And given the current market conditions, did that make you feel more or less comfortable with what you want to write?

David A. Brown

The reception was, as you can see by the growth, very good for Flagstone, we thought we started with a flying start out of the gate when we began our company. The growth and that recognition continues, probably on the back of the great service. You mentioned casualty business, we really don’t write casualty except on the back of shorten sail lines. But the growth as we said in the release and in the call was really both growing with existing clients and that was a large part of our business, growing in other line of business with existing clients and also getting some new clients that we’ve been looking at in some cases for a year or so working on relationships with them and developing those possibilities.

Mark J. Byrne

I’ll add chip one more thing on, with regarding with the ratings specifically of course A- has become a better rating within the universe over the last few months due to the troubles of other people. But at the same time, this in principle, this would be the year that we would be hoping to get the minus to go away. You may recall that as a new company in 06 we were basically, by the different rating agencies, more or less required to operate to about a AA standard of capital adequacy to have an A- rating, so it’s quite a haircut. In principal this would be the year that that goes away and that certainly something that’s square in our agenda to try to make happen and I would only say that I’m a little cautious of predicting that this year just because of the difficult ratings environments. I think there are better years to try to get an upgrade than 2008 so we’re gonna work hard on that in 2008. But we certainly feel we deserve it as a view standalone and so that will certainly be added to the casualty business as we go but we haven’t found the A- rather than an A to be an absolute part of the casualty business that we’re trying to write, which is short and medium tail business.

Joshua Shanker – Citi

Have the rating agencies given you any indication or particularly A.M Best whether or not such a thing would be possible?

Mark J. Byrne

I don’t really want to comment yet, anything is possible but I wouldn’t want to comment further on the ongoing discussions. It’s something we have regular and routine contact with the rating agencies. They certainly know it’s on our agenda and I really wouldn’t to comment on the odds this year other than to way we’re trying.

Operator

(Operator Instructions) Your next question comes from the line of Jay Gelb of Lehman Brothers

Jay Gelb – Lehman Brothers

With the inclusion of Island Heritage I just want to see if I can understand perhaps some base line assumptions going forward. For 2008 does Flagstone intend to fully deploy its capital?

David A. Brown

I’m not sure that’s related to Island Heritage, we certainly do intend to fully deploy our capital in 08 and that our expectations, I think we’ve said that before. What was your specific question on Island Heritage Jay?

Jay Gelb – Lehman Brothers

I guess related to that last comment, what should we be thinking about for overall for Flagstone in terms of gross written premiums for beginning capital in terms of being able to deploy the capacity in 2008?

Mark J. Byrne

First as far as fully deployed, there’s a lot of different measures of fully deployed on our internal measures we would feel comfortable with considerably more premium to capital than we have now if you look at the rating agency test given the hair cut that’s applied to young companies, we think we’re at a prudent margin away from the limits that we would have, but reasonably fully deployed particularly with respect to the A.M Best test. So it’s not a question of we expect to deploy, in my mind I would say we are deployed at least as far as the A.M. Best B Card test is calculated today. As far as premium to surplus levels, I would expect to see them go upwards this year and next both with Island Heritage consolidated, which would give us a higher premium surplus since their premium to surplus is well over 100% and also as the Swiss specialty and non-cap business comes online, it uses less capital in terms of the B Card test and the Fitch test, and the Moodys test so we’ll be able to write more of that business in premium terms without growth in capital. So I’d expect to see those trend upwards but you may remember we’ve said before that we don’t have a premium to surplus target and we’re reasonably happy to jump between excess of loss line and working layers on reinsurance contracts depending on where we see the opportunities as we did some of this renewal from quota shares up to excess of loss. So with some volatility I would expect that trend to be upward and then whenever we’re able to shed this new company mantle I think you’ll see another pop of 10 to 15 % probably immediately after we’re able to do that.

Jay Gelb – Lehman Brothers

10 to 15% on the gross written premium? Or 10 to 15% on premium to surplus?

Mark J. Byrne

Premium to surplus. It would be the same think as it would be almost immediate. That is to say the distance between the rating agency margin and our own comfort zone is about 25% today. So my guess is that we would take up a pretty reasonable amount of that slack as soon as at least a couple of the three rating agencies who rate us were comfortable doing that.

Jay Gelb – Lehman Brothers

On seated premiums, how should we think about that in terms of the dollar amounts in 2008 or on a percentage basis to gross?

James O’Shaughnessy

As we mentioned Jay in the transcript, that’s all a decision by the underwriter staff to manage risk portfolio. At the end of 2007 it was about 8.5% and I think that’s really just a function of the business we write. But somewhere between 5 and 8% is probably a reasonable target to work with.

David A. Brown

That’s obviously a difficult number for us to estimate on an accounting basis, often we write new business specifically to seat [inaudible] as we have in the past. So that really is businesses as it flows through increases the top line but we always write it with a view of sitting at the back end. Specifically on Island Heritage which is what I think you were eluding to, presently the number at the end of 07 really just show consolidated picture and economically not a lot of that value has flowed through to Flagstone because we are a shareholder but Island Heritage itself retains very little risks because of its constraints from an A.M Best point of view. One of the reasons to acquire that was we can change that paradigm, and as we elude to in our report, what we expect to do is to see more of the economics of Island Heritage flow through to Flagstone. So that will have an impact on how much reinsurance Island Heritage buys and from whom it buys it. So we’re working on that right now with the company, but we don’t expect to see a substantial amount economically flow through directly from Island Heritage to Flagstone. Notwithstanding the fact that on an accounting basis it’s consolidated, this is from an economic point of view.

Jay Gelb – Lehman Brothers

On the acquisition costs and the G&A line should we anticipate that the acquisition ratio continues to rise? I know there was some one-time effects in the fourth quarter, and how much either on a dollar amount or percentage basis relative to the premiums should we be thinking about for G&A expense in 2008?

James O’Shaughnessy

On the acquisition, the year ended in acquisition at around 17% . As I mention in Q4 there was an impact to the profit commission. From a long term perspective I think somewhere between the 15 to 17% is a reasonable number to work with. On the G&A, as you recall from pervious calls, we pretty much target, we don’t generally target as a number based on net premiums earned, we generally focus on a percentage of shareholders equity and that’s generally around 5 to 6% of shareholders equity and at year end 2007 we were right at the 6% so I think that’s a good basis to work for 2008.

Jay Gelb – Lehman Brothers

To bring it all together you were able to achieve your 17% book value growth estimate for the year based on current market conditions, does that seem reasonable for the next couple years as well?

Mark J. Byrne

Everybody else is wincing Jay, so I’ll go ahead and say I’m optimistic we’ll be able to do that, and obviously it depends on the losses. This was not a low loss year, this would be more like a low to medium loss year for a globally exposed reinsurer, and I think if we had the same year again we’d probably do the same or a little better. The new investment strategy we sort of put into place in the spring of last year and was able to add about 150 basis points this year to our return versus the previous strategy, maybe 165 somewhere in that range. Now that we’re able to implement it more - had we’d been able to implement fully it would have added more like 400 basis points, so that’s a bit annoying. But now that we can implement it more fully we would expect that it should give us long term investment returns in the 8 range and if we’re able to do that if our float builds we think that’s quite a positive factor.

The investment in people is one that as David and I are big owners here as you may recall, we’re very comfortable that say 2 points higher that we could have made had we not decided to make these very big investments in R&D and people. We think that we spent that 2 points very well and that a company with 250 people and the kind of intellectual resources we have has a chance to be a different thing than just another [inaudible] player. So we’re very comfortable with that bet, at the same time, each of those bets have costs that immediate and returns that are where from six months to two years down the road. We don’t have anything that’s more than two years down the road, but we do have some medium term and longer term projects and when you do R&D you don’t get 100% results you get fractional results. But we could have made 19 instead of 17 this year by simply operating our business a bit more like our competitors do and we affirmatively made the choice that we want to try to be a different kind of company and so we’re very satisfied with the result. I believe we’re gonna stay in that 6 or maybe 6 to 6 1/2 range in 2008 for the G&A and over the long run the investment income will more than cover it, which is a handy rule of thumb way of thinking about it. So I guess that’s a long winded way of saying that we are pretty optimistic for 2008 but we’re also trying to build a company for 2009, 2010, and 11.

David A. Brown

Just for the record I wasn’t wincing. I do believe and I think the business we’re seeing, the margins we’re seeing in the business remain attractive we’re certainly seeing it throughout our global platform we’re seeing lots of flow of business. So I’m comfortable that we’ll see business at the right margin in sufficient quantity for us to make that kind of return through 08 and probably through ’09. Just one point as well, [inaudible recently had some interesting stats that if you look at – if you’re a global player like we are, i.e. truly writing this risk around the world and not just focused in North America, in 2007 there is about $30 billion of cap losses according to [inaudible]. That was twice what there was in 2006. So in terms of the market we address it was a very active year last year, as I’ve pointed out a number of times, and we are very pleased with our results in that environment and expect to be able to continue with those results as Mark said, subject to losses. But, at any reasonable losses we do expect to make those returns.

Jay Gelb – Lehman Brothers

That’s very helpful. I’d be glad to ask just one more, potential changes to the Florida Hurricane cap funds whether Citizens is going to buy more private market reinsurance and the Florida Hurricane cap fund is going to provide less? Can you give your thoughts on that situation and how Flagstone might be able to take advantage of it?

David A. Brown

Obviously, as we’ve said before reading the tea leaves of politicians is a difficult exercise. We’re probably hearing the same news that you are Jay which is that the indications are $3 billion less protection will be provided by the cap fund in the upper layer, some talk about possibly some changes in the lower layer too and also that probably Citizens may be out there buying $1 billion to $1.5 billion of it. So, some numbers in the $3 to $5 or make it higher billion dollars of new [inaudible] required for Florida. That’s obviously got to be posted for the commercial reinsurance market and we look forward to seeing what happens as we get to June and July.

Operator

(Operator Instructions) Your next question comes from the line of Ian Gutterman of Adage Capital. Please proceed.

Ian Gutterman – Adage Capital

I just had a couple of numbers type questions. Can you remind me for Island for all of 07 what their gross and net was? For the company not what was in your financials but the actual company?

Mark J. Bryne

The gross for Island Heritage, it’s approximately $70 million gross and about 65% of that is seated.

Ian Gutterman – Adage Capital

Then, do you plan then when you’re saying that you’re going to retain more of that on your own books, can you give us some kind of sense of what that will mean for 08 on a net basis?

David A. Brown

The reason I cannot give you a number is because we’re still working on the reinsurance program. We’ve decided as a company how we’re going to structure it and we’re out now placing an excess of loss ownership program and the share of that that Flagstone takes is not yet determined. I can tell you that it will be substantial but we don’t yet know what the number is.

Mark J. Byrne

We can say more than half, I think, right?

David A. Brown

Yeah.

Mark J. Byrne

More than half.

Ian Gutterman – Adage Capital

That’s fair. Then, what kind of combined does Island run? And again, I don’t know if I need to think of that on a gross percentage? I guess I mean on a price basis, does it look differently than the rest of your book? Is there going to be a mix change in 2008 as it rolls in more?

David A. Brown

The way to think about Island is it is really a way to get cap exposure. A traditional loss ratio absent caps is in the single digit, I mean 1%, 2%, it’s very, very low with traditional losses. So, really what you’re doing is collecting a large amount of premium over diversified [inaudible] and taking a cap there. That cap sits much better on a balance sheet of $1.2 billion like ours than on a $30 million balance sheet at Island Heritage and that’s really what we’re trying to achieve here.

Mark J. Byrne

So, to further emphasis the fact that its mostly cap risk, Island Heritage’s average deductibles is about 2% across the Caribbean. So, besides the larger balance sheet being a great efficiency, we’re taking this small company that basically would never have access to running cap models except via perhaps their broker they might see upwards of one model and we’re giving it all the intellectual resources of Flagstone. So, the objective would be to make it the best underwriter in the Caribbean if it’s not already. And, we’re pretty ambitious in terms of what can be accomplished in the Caribbean, it’s a very fast growth area where Island Heritage is currently deployed only in the English speaking part and there’s a French speaking part and a Spanish speaking part so there’s a lot more to that part of the world than they are currently exploring and we think it has a bright future as a consolidated semi subsidiary of Flagstone.

Ian Gutterman – Adage Capital

Okay. That makes sense. Then, I guess just one underwriting point on that, just how do you guys think about I guess correlation between obviously there are plenty of storms that go through the Caribbean into the US, how do you make sure you’re not just sort of doubling down on a US storm? Where does that fit into your zone? Could that end up giving you guys, if you look at things on a zonal basis, if you have storms that come through and hit two zones and then you have two full zone losses because you missed something? I assume not but I just want to make sure how you’re looking at it.

David A. Brown

You’re correct Ian. On a gross level we do track the Caribbean as a separate zone compared to Florida for instance and we are aware of some correlation between the two zones, in fact the correlation between that and the Gulf. The way we monitor that is by constantly running our portfolio models where we use RMS, [inaudible] and we run the whole portfolio. They have in their catalogs events that do in fact do what you describe, that go through the Caribbean and then hit Florida or even hit Florida on the gulf. So, when I quoted earlier our P&L numbers, in there somewhere in the statistics are situations where events will run through Caribbean exposure, Florida exposure and maybe even Gulf exposure to create a very large loss. The benefit though, if you think about it from Island Heritage is we’ve got incredibly granular data, we know every single home that they insure down to the finest detail. So, in terms of our focus on data and granularity, this is an excellent way for us to underwrite because we get absolutely first class data in order for us to run those correlations and actually make the output meaningful.

Ian Gutterman – Adage Capital

That makes sense. Like I said I assumed you were on top of it I just wanted to make sure I could explain it to myself. Then just lastly, on that Australia storm – actually, I guess I have two more. The Australia storm can you just talk a little more about that? I guess, to be honest I wasn’t too familiar with that and $11 million seemed a fairly sized loss for what to me was a small event but maybe it was a larger event then I realized.

David A. Brown

That was the Sydney hailstorm?

Ian Gutterman – Adage Capital

Yeah. How big of an industry was that?

David A. Brown

The industry event was about $300 million.

Ian Gutterman – Adage Capital

Okay. So, is that considered a normal almost share for you on an Australia event? Or does that feel like maybe you got hit more than you should of?

Mark J. Byrne

It was triggered on a second event cover which we had a decent share on.

Ian Gutterman – Adage Capital

Got it. Then, the final question was the releases in the quarter that were from some of the 07 events, you had in the press release your total losses in 2007, for example $32 million for Cairo, $18 million for the Australia flood, was that before or after these Q4 releases?

David A. Brown

That was after the Q4 releases.

Ian Gutterman – Adage Capital

Okay. Because, I guess I had some of those as your original numbers so maybe I just have to follow up off line on which events. Okay.

Operator

(Operator Instructions) There are no further questions at this time. Brent, please proceed with your closing remarks.

Brenton Slade

Thank you once again ladies and gentlemen. Before I let you go, please let me remind you that a replay of this webcast will be available on our website from 12 Noon today until Midnight on March the 19^th. Please visit the investor relations section of our website at www.Flagstonere.bm for further details. That concludes the proceedings for today. We look forward to speaking with you once again at the end of the next quarter. Thank you very much.

Operator

Ladies and gentlemen thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a wonderful day.

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