CastlePoint Holdings Q4 2007 Earnings Call Transcript

Mar.10.08 | About: Castlepoint Holdings (CPHL)

CastlePoint Holdings, Ltd. (CPHL) Q4 2007 Earnings Call March 6, 2008 2:00 PM ET

Executives

Joel S. Weiner - Chief Financial Officer, Senior Vice President & Director

Michael H. Lee - Chairman of the Board & Chief Executive Officer

Gregory T. Doyle - Director

Analysts

Elizabeth Malone – KeyBanc Capital Markets

Michael Grasher - Piper Jaffray

Bijan Moazami - Friedman, Billings, Ramsey & Co.

Jonathan Lubert – IL Hedge Investments

Brad Gendells – Cumberland Associates

Operator

Good day ladies and gentlemen my name is Gwen and I will be your conference facilitator today. At this time I would like to welcome everyone to the CastlePoint Holdings’ fourth quarter 2007 earnings conference call. Today’s call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. At this time for opening remarks and introductions I’d like to turn the call over to Mr. Joel Weiner, Senior Vice President and Chief Financial Officer. Please go ahead sir.

Joel

Good afternoon and welcome everyone. During this call CastlePoint Holdings Chairman and CEO Michael Lee will discuss highlights of the quarter and Gregory Doyle, President of CastlePoint Holdings will review the progress in our profit centers. I will provide details on our financial performance during the quarter. We will end the earnings call with a Q&A session.

Before turning the call over to Michael I want to remind you that some of the statements that will be made during this call will be forward looking statements as defined in the Securities & Exchange Commission act of 1934. In particular, statements about projected levels of growth and premiums written and earned, percentage of net premiums written that will be earned, the volume of premiums produced and income and net income per share combined ratios and expense ratios, consolidated combined ratio and insurance [inaudible] income, investment income, amount of invested assets, operating leverage, investment leverage and any other statements containing information that is no strictly historical in nature constitute forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements. For more information on the risks and other factors that may affect future performance investors should review periodic reports that are filed by the company with the SEC from time-to-time.

Also, I’d like to remind everyone that this call is being broadcast over the Internet in the investor relations section of CastlePoint’s website. A replay will be available on that website. Now, I’d like to turn the call over to Michael.

Michael

Good afternoon everyone. I’d like to thank all of your for joining us this afternoon to discuss the fourth quarter and full year 2007 results. During our full year of operations in 2007 we substantially accomplished all of our objectives that we communicated through our shareholders. First, we had a very successful initial public offering in April, 2007 and raised $114 million in addition to the $249 million that we raised through the 144A offering in March, 2006. Second, we successfully deployed the capital that we raised from investors by growing our written premiums to approximately $376 million from Tower as well as other clients. We also strengthened our management team and infrastructure in Bermuda and New York to be able to deliver our reinsurance risk sharing and program solutions to our clients that include Tower, small insurance companies and program underwriting agents. Our approach of offering capital paper and insurance services to solve our clients problems is unique to the property and cash for the industry and is resonating strongly with our clients. For these reasons we are very pleased with the progress that we have made in 2007.

Now, turning our attention to our operating results I am pleased to report that CastlePoint once again produced excellent operating results this past quarter and for the full year 2007. Excluding realized and unrealized investment gains and losses our net income increased by 84% for the fourth quarter to $12.5 million from $6.8 million during the same period last year and our EPS increased by 39% to $0.32 per share compared to $0.23 per share for the same period last year. For the full year, our net income excluding realized and unrealized investment losses, increased by 296% to $41.6 million from $10.5 million in 2006 and our EPS increased by 143% to $1.14 per share compared to $0.47 per share in 2006.

During the latter half of the year we faced very challenging investing environment due to the significant events in the real estate and fixed income markets. As Joel will explain in further detail later during the earnings call we wrote down by charging net income, certain sub-prime mortgage related [inaudible] and reinvestments in the fourth quarter most of which was already reflected on our balance sheet at the end of the third quarter. In February of 2008 we completed our plan to reduce our exposure to sub-prime mortgages that we wrote down in the fourth quarter by selling all of our sub-prime exposed investments at a nominal loss. As a result of these actions we believe we have taken proper steps to respond to the challenges in the investment environment and strengthen our balance sheet to support our growth in 2008.

Despite the competitive market environment we continued to experience significant demand for our solutions from Tower as well as other clients. This is reflected in our net premiums written during the quarter which increased by 173% to $133 million from $49 million during the same period last year. For the full year 2007, our net premiums written increased by 128% to $376 million from $165 million in 2006. Since the agreement with our risk sharing clients other than Tower were established in the latter part of 2007, we anticipate strong production from these clients in 2008. We also continue to see strong premium growth trends from clients other than Tower. During the year we wrote 25% of our total premiums from clients other than tower. Greg will go over these accounts with you in further detail.

Despite our strong premium growth we maintained our underwriting discipline as reflected in the 88.9% combined ratio in 2007 for the total of our reinsurance and insurance segments comprised of a 52.9% loss ratio and 36% expense ratio. Finally, as reported in today’s press release we are terminating, or I should say we have terminated our Shelf X1 Registration statement that we filed last August for the shares purchased in the private offering in April, 2006. As a result of modifications to the SEC rules that became effective February 15, 2008 non-affiliated shareholders who still own the private offering shares may sell their shares in the open market without the Shelf Registration. In addition to the press release, we have sent each purchaser of the private shares an individual notice setting forth our termination of the Shelf Registration and the explanation of the new rules.

With that overview I would like to turn the call over to Greg for further detail regarding our business solutions.

Greg

During 2007 we made meaningful progress in growing our relationships with new clients by providing quoted share reinsurance, primary risk sharing and program solutions. We continued to see profitable growth opportunities due to our ability to offer unique customized solutions to small insurance companies and program underwriting agencies by providing access to our capital, paper and insurance company services. In a competitive market we have maintained our focus on aggregating existing profitable books of business with clients who have an established track record so that we minimize the risk associated with writing new business. With respect to our primary risk sharing business solutions, we continued to see strong demand and now have two expanding client relationships with significant premium volume potential in addition to Tower. During the quarter we commenced writing business with a new risk sharing client that we signed up in the third quarter. This client writes small workers’ compensation accounts with a similar exposure profile to Tower. During 2008 we will have the benefit of a full year’s worth of their business and thus we’ll see strong growth from that.

With respect to our program business solutions, we continue to see opportunities with program underwriting managers that are seeking to partner with a company with whom they can build a dedicated business relationship. We have been able to compete effectively with more established companies in the program business market by using our solution driven approach. We have also been successful in establishing a strong business relationship with key program underwriting agents by allowing them to distribute their products in a particular territory without creating conflicts with other clients. By creating this type of business relationship we have been able to effectively differentiate ourselves from competitors who have several clients competing with each other within a particular territory or distributing similar products. Using this business approach we successfully entered into four new program business relationships in 2007 and developed a strong pipeline of opportunities that we believe will generate profitable growth in 2008.

With respect to our reinsurance business, CastlePoint firmly established its reputation during 2007 for providing quoted share reinsurance solutions to small insurance companies and program underwriting managers. Despite softening in the reinsurance market CastlePoint is seeing continued demand for our quota reinsurance product from clients who are already accessing or are interested in accessing our primary risk sharing capabilities through CastlePoint management in the US. During the quarter, we entered into agreements with several new clients by providing quoted share and excess reinsurance solutions. This business includes liability coverage for small hospitality and habitational risks, small average policy premium workers’ compensation accounts which are similar to the exposure of our Tower business and regional mainstream property and casualty business. Some of this business incepted during the quarter and some at January 1, 2008 and as a result we are well positioned for profitable growth molding into 2008 in our reinsurance business. Despite the strong growth in all of our business units we are maintain our underwriting discipline by utilizing our underwriting guidelines to focus on writing small, low hazard business that has generated profitable underwriting results. The steady flow of business from Tower as well as strong interest in our product solution allows us to be very selective in choosing our clients.

As a result we engage in detailed analysis on a very limited percentage of our total submissions. This selectivity allows us to target clients with a book of business that is less susceptible to the softening marketing conditions due to their focus on writing small premium sized policies, unique niche markets or access to an underserved distribution system. In addition, our selectivity enables us to maintain a cost effective underwriting and marketing infrastructure.

In summary, we continue to see a good flow of opportunities across all of our product solutions, we have consistent application of our underwriting policies and procedures, our selectivity is high and we are growing our new client base. As we move into 2008 we expect to exceed our near term target of 30% for non Tower business.

Now, I will turn the call back to Joel who will provide further details on our financial results.

Joel

I’ll begin with a discussion of our consolidated results for the fourth quarter and full year 2007 including a review of the financial results of our reinsurance and insurance segments. Then, I will go over in some detail our investment portfolio and also go over the earnings guidance for the first quarter and the full year 2008. As Michael mentioned earlier, fourth quarter and full year operating results again, were excellent. For the quarter our operating earnings which excludes realized and unrealized gains and losses increased by 84% to $12.5 million which was $0.32 per diluted share and that was an increase of 39% from the prior year period. For the full year, our operating income again, excluding realized and unrealized gains and losses was $41.6 million. This was an increase of 296% from the prior year period. Our book value per share as of December, 2007 was $11.02. This was an increase of 16.5% from the prior year end.

In our reinsurance segment net premiums written in CastlePoint Re were $77 million for the quarter and $285 for the full year. This was an increase of 58% and 73% for the quarter and full year respectively. The combined ratio in our reinsurance segment was 87.5% and included a 52.1% loss ratio and a 35.4% expense ratio. The combined ratio continues to reflect excellent loss ratios from Tower as well as our other clients. Our loss reserves developed favorably during the year. The expense ratio also declined by .8 points from the prior year which reflects our increasing economies of scale as the business from clients other than Tower continues to grow. Underwriting profit in CastlePoint Re was $8.8 million for the quarter and $28.7 million for the year representing a 107% increase and 204% increase for the quarter and year versus the prior year periods. CastlePoint Re is operating well and in 2008 we expect it to continue to grow with excellent profit margins.

Our insurance segment through CastlePoint Insurance Company or CPIC had gross written premiums of $68.7 million in the quarter including $60.1 million of Tower’s business. For the year, CastlePoint Insurance Company has $111 million gross written premiums which included $97.4 million of Tower’s business. The gross combined ratio meaning before reinsurance seated was 94.4% for the year including a 60.7% loss ratio and a 33.6% expense ratio. We expect a combined ratio for CPIC to improve during 2008 as its business matures and as the property [inaudible] seated premiums are spread over a larger earned premium base.

Now, let’s turn to our investment portfolio. Michael mentioned earlier that we responded to the dramatic credit spread widening for real estate bond investments. You will recall that when we reported the September results we discussed that these bond investments had caused unrealized investment losses due to the overall investment market condition. During the fourth quarter we did a thorough analysis of our investments including obtaining advice from an additional independent investment advisor concerning our exposure to real estate related investments and sub-prime in particular. Even though we did not hold much sub-prime investments, in fact we held approximately $11 million of sub-prime as of September which represented only 1% of our invested assets we decided to be proactive and sell these assets in order to reduce risk in our investment portfolio. We have since sold all of our sub-prime assets this February at a nominal loss of about $200,000. Therefore we now have no more sub-prime exposure. Since we had already reflected in book value as of September 30th, 2007 the market value of these assets at that time the impact on our book value of marking down these assets at year end was only the change in market value for these assets during the quarter which was a reduction in book value of $4 million.

In addition primarily as a result of our change and intent to hold other real estate related investments until full recovery in market value we took other than separate re-impairments on the common stocks that we held that invest in REITs for a realized loss of $1.8 million on a pre-tax basis. We also continue to maintain a relatively small investment in a limited partnership investment company which invests in municipal bonds on which we recorded a loss through investment income of $1.5 million in 2007. We and our investment manager believe the unrealized loss in this investment resulted from temporary dislocation in the marketplace and we believe the investment will recover over time. The municipal bonds are primarily AAA rated and the investment manager believes these ratings are not dependent upon insurance guarantees. Our decisions to sell all of the sub-prime assets and to mark down the value of the common stocks and other changes resulted in a realized loss in the quarter and full year of $8.1 million and $8.2 million respectively. As a result of the write down of the impaired securities the unrealized loss in our overall portfolio improved from a $6.6 loss as of September to $1.1 million as of December. Because of these proactive investment actions which we took our investment portfolio is stronger and more conservative. The average credit quality for investment portfolio is AA plus. Our book yield as of year end was 5.5%. The portfolio duration was 2.2 years at the end of 2007.

Also because of our strong growth our invested assets including cash and cash equivalents increased 63% to $694 million. For the full year our net investment income increased by nearly 164% to $29.5 million compared to $11.1 million in 2006. Our return on equity excluding realized and unrealized gains and losses increased during the fourth quarter to 12% from 9.8% for the same period last year. Due the natural lag between premiums written and earned only 66% of the net premiums or $248 million was earned during the year. As our business becomes more seasoned and the earned premiums are normalized in relationship to written premiums we anticipate that ROE will gradually increase above 14% in 2008. For the full year our return on equity was 10.9% compared to 5.1% in 2006.

Finally let me go over the earnings guidance for 2008. As noted in our press release for the first quarter of 2008 we project our net income to be in a range of between $9.5 million and $12 million and diluted earnings per share to be in a range of between $0.25 and $0.31 per share. There are several things to keep in mind about the first quarter earnings as compared to the full year guidance. First, our earned premium revenues for the first quarter represents approximately 18% of the earned premium revenues for the full year due to the seasonality of our business. Also our margins will improve throughout the year as the operating and investment leverage will improve each quarter. And finally our accrual for taxes for the first quarter will be based upon our higher tax rate applicable for the full year rather than the lower actual tax rate that would otherwise apply to the lower first quarter earnings. For the full year our guidance for net income is in a range of $67.5 million to $71.5 million with diluted earnings per share between $1.75 and $1.85.

Now we would like to open the call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll go first to Beth Malone with KeyBanc.

Elizabeth Malone – KeyBanc Capital Markets

When you are establishing these relationships with outside of Tower is there any thought that – is it possible that they would become acquisition targets for CastlePoint at some point or are they strictly just reinsurance relationships?

Michael

That’s a very interesting question because we often think about that as well. A lot of our risk sharing clients lack capital and they depend on us for the risk sharing as well as quoted share of reinsurance solutions. So in effect we provide capital to our clients so that may be a situation that eventually changes where they would want to sell or raise additional capital and that’s the case with most of our risk sharing clients. In fact we had discussions with a lot of these clients about what the exit strategy might be and in fact it is possible that we would end up acquiring them, so we think we have a very good approach towards consolidating these small companies by providing these solutions and if they want to sell their business we have the ability to consolidate these small companies by acquiring these companies ourselves or by working with Tower to be able to have them acquire these companies and make them more profitable by consolidating these companies under Tower and allow them to bring more efficiency and profitability.

Elizabeth Malone – KeyBanc Capital Markets

And then in terms of how you find the companies that you want to establish reinsurance relationships are you looking for a specific type of business mix or market that you’re targeting or what are the criteria that you’re looking for?

Michael

We have a lot of clients, Greg and I, that we know from our contacts, these clients really come to us or they’re referred by reinsurance intermediaries or investment bankers and all of them as I mentioned have one theme in common which is that they lack capital and they’re looking to partner with CastlePoint. Since we have a unique solution in providing paper, the higher rating as well as capital through quoted share reinsurance and we also are active in looking at providing strategic investments to these clients we are pretty well known in the marketplace as the company to go to address these types of need. So our problem quite frankly is that it does take a lot of time to work with these clients and these deals are fairly significant. So some of the deals that we had put on in 2007 are going to generate premiums potentially in excess of $50 million so we don’t have to look for too many clients and in fact we have a list of potential clients, a significantly really long list of clients and we’ve only tapped into only a few of them. Greg, do you want to add to that?

Greg

I would just add to that, that from a product perspective it’s consistent with what we’re looking to write which for the most part is low to medium hazard exposure business with relatively short claims tail. So if you look at the kind of business that we’ve written already, non-standard automobile, small account workers’ compensation like I mentioned during our remarks, non-tier one property exposure, main street general liability type accounts, that’s the basic business that we’re looking for that goes with all of the potential clients that Michael described.

Elizabeth Malone – KeyBanc Capital Markets

And then one last question on the investment decision, you all completely exited any sub-prime exposure you have in your portfolio and I was just wondering that seems – I understand the market’s very unstable but it seems a little aggressive to jettison everything at these prices here. Is your strategy just to remain extremely conservative in your investments or are you looking for other places to put capital now where there’s better opportunities?

Michael

We decided in 2007 to go with a manager that used different techniques and invest in sub-prime mortgages and what we have gotten out is this type of investment because it was managed and they used investment strategies that relied on their expertise and we didn’t feel comfortable with that and now we’re back to looking at very conservative investments mainly direct investments where we can hold these investments to maturity rather than rely on an external manager that uses leverage or uses other investment techniques and we felt that investing in that type of situation creates volatility. So we had internal discussion about our investment philosophy and we decided that it would be best if were to go with an investment philosophy where we invest directly in these types of investments rather than investing in these various funds with the exception of one or two funds that we have a lot of confidence. So I would say it was overall a modest change in our investment philosophy in response to what’s going on in the marketplace.

Elizabeth Malone – KeyBanc Capital Markets

And then just one last question on the companies that CastlePoint reinsures non-Tower Group does Tower Group provide any services to those reinsurance companies for a fee that’s collected by CastlePoint? Is that part of the revenue stream for CastlePoint?

Greg

No, Beth. In the case where CastlePoint Re is doing completely non-related Tower business that’s all handled within CastlePoint.

Operator

And we’ll go next to Mike Grasher with Piper Jaffray.

Michael Grasher - Piper Jaffray

I wanted to follow up on Beth’s question here just in terms sort of the broad landscape of the business outside of Tower and wondering if you could share with us sort of the normal account size for some of these clients, the number of accounts, some of the background or some of the information around that?

Greg

I touched on that a little bit so why don’t I start with our reinsurance business. We’ve got most of our business in the reinsurance area right now is quoted share reinsurance and as I mentioned it’s a mix of predominantly low to medium hazard, relative short tail business as I said, non-standard automobile, the small account worker’s comp, etcetera and the average size of those on the quote share basis in CastlePoint RE is somewhere between $8 to $10 million, some can be a little larger, some can be a little bit smaller. In the program and the risk sharing areas of our business which again for the most part we seek the same type of business the accounts have tended to be larger than that. It’s almost because our strategy is to be highly selective and have a small number of clients with whom we can be extremely focused on with meaningful sizes of premium, taking an average there doesn’t do it justice but they can be anywhere from $10 million, $20 million, $30 million as Michael commented on during some of the prior questions. So they tend to be sizable and the benefit of that from our perspective when we can find the right partners with whom to engage in a business relationship is that we can focus a lot of our resources on a relatively small number of clients and be very focused on what they’re doing in the marketplace, how we can assist that but also to make sure that it goes the way that we intend it to from a results perspective.

Michael Grasher - Piper Jaffray

And just a follow up to that point right there, you’re talking about the program risk sharing, how do you get comfortable, what’s the process like in getting comfortable with writing that amount of business for a particular carrier?

Greg

We actually have a formal four phase process and I won’t bore you with all the phases of that, but there’s strong underwriting, actuarial, financial, systems diligence that we perform on that program underwriting agency or risk sharing potential partner. So those are all very important components of what we do. We also understand where they are positioned in their marketplace and what they’re doing and for risk sharing clients we actually look to align our interests by having them take a portion of that business back into their own insurance company so they are responsible for the results as are we. For the program business they’ll do that to a lesser extent but they’ll do that typically through a sliding scale that we’ll have in there. Also a very important component is that our final underwriting process, the underwriting committee process is all senior management, Joel, Michael, myself as well as several of our other senior managers but we are all actively involved in the process and we are all formally involved in the ultimate sign off on all the new business that we write.

Michael

Just adding to what Greg said I think what you should keep in mind is that we only look at established books of business with a proven track record and we do a thorough actual analysis so it’s sort of like acquiring renewal writes books of business as opposed to writing new business in the softening market. Most of our clients are disciplined underwriters so in fact, just like Tower, we monitor the rate, make sure that they’re not cutting the rate, they are prudently underwriting and we’re very much experienced in monitoring those types of activities in addition to what Greg said we know which types of clients for the business, generate what types of losses and we’re looking at low severity short tail type of business and finally with a lot of reinsurance contracts as well as risk sharing we have sliding scale and risk participation so that if the loss ratio does go up we pay less commission within the band that’s necessary obviously to pass this transfer and to establish a reinsurance or risk sharing agreement. So with all those types of techniques that we have built in on top of that us being very selective about who we choose to do business with we feel very comfortable with our underwriting.

Michael Grasher - Piper Jaffray

Just one final follow up on that, are there any third parties at all involved in terms of maybe auditors that take a look at the financials on one of these companies?

Michael

We do that, we send our audit team and they do a thorough review of these clients from underwriting financial claims, so we do a comprehensive review of these clients.

Greg

Let me add a little bit to that, Mike. For the reinsurance company in particular because they do not have staff in the US but also including the CastlePoint management in the US where we need it we do pull in outside firms to do independent audits of both before on a due diligence basis and also after these things are bound.

Michael

I should also add to that that we collateralize in most cases any potential financial obligations that will come back our way just as a further protection from a financial perspective.

Michael Grasher - Piper Jaffray

And then I did have an additional question here with regard to the competition, one of the questions I frequently get is who else is doing this certainly from a hybrid model CastlePoint is unique but in terms of the focus on the small companies, the small insurance companies in providing quoted share for them how much more competition is there and do you run up against the same folks every day?

Michael

We don’t really quite frankly. We know who to go after and we’re the only ones that are really providing the paper and the capital and insurance company services to really take our clients book of business and find a home for them. So we’re the only company that we know of that can bring all those capabilities to our client in an integrated fashion. You may have primary companies that lend their paper, you may have a reinsurance company providing quoted share, you may have a third party vendor that provide insurance company services but they don’t do it in a coordinated fashion and certainly they don’t do it as well as we do in terms of structuring transactions, taking into account the legal, regulatory, the financial, all those type of analyses that goes into structuring a deal like this involves a significant level of expertise that we have because most of us have background in this area whether it be at Tower or other companies that focus on this area. So when we built this company we recognized that there was a void in the marketplace and it’s not like someone could come along and replicate what we’re doing now. Like I said we’ve gotten as much business as we want given our capital and I don’t think that’s really the problem. I know that there has been some lag between the time that we sign these clients to the time they actually produce business but we feel very confident that the business will come because we know that we have already signed contracts and we know how much business that they have written and how much they committed to give us of that business. So if we did miss on the revenue it’s only because of the timing of doing all of the things necessary to set these clients up. But once we have it set up as we did in 2007 we feel very confident that we’ll start seeing meaningful production as we started seeing on 2007.

Michael Grasher - Piper Jaffray

And then that raises one final question here, follow up in terms of how do you sit on capital for 2008 as you look out at your earnings estimates and then by the end of the year where do you think you may be?

Michael

I think what we’re looking to do is manage our capital a little more effectively. I know that we raised capital and we’re leveraging that up and we have successfully leveraged that but based on our premium writing we probably will have to cede some of the business that we originate to third party re-insurers to provide us with additional capacity. So in the programs area we’ll probably be ceding a meaningful amount of our business to third party re-insurers to provide us with additional capacity.

Operator

We’ll go next to Bijan Moazami with Friedman, Billings, Ramsey.

Bijan Moazami - Friedman, Billings, Ramsey & Co.

I missed a portion of your prepared remarks but I want to focus on the investment portfolio. I’m certainly not way too worried about it but it seems like market is, I wondering if Joel can spend some time on the due diligence that he’s performed on that investment portfolio in terms of you brought in any outside consultants to review what is in there and how you guys evaluated the performance of those bonds and how you’re viewing it going forward.

Joel

It wasn’t just me that was doing this, there were a number of people, Rick Barrow our Chief Accounting Officer, Michael and myself and others in our financial area were involved. We brought in another investment bank that has – I don’t know if I should mention their name right now, but they are very, very skilled and we had them look at all of the bonds that are in question and also as you know or probably know that we tested all of the bonds for creditworthiness and also there’s accounting requirements for anything that has any sort of potential derivative feature within it, you have to test and confirm that that meets your pricing. Also PWC, our internal auditors, has a very, very excellent procedure. They took all of our assets and subjected it to independent pricing using their vendor and so the confirmed the pricing that we were getting from Black Rock and our other investment bodies so we did an awful lot of work to make sure that the pricing in our portfolio was current and accurate. As I say on the bonds we did cash flow reviews for probably 50 bonds or so that had any potential questions relative to them and they all passed.

Michael

Just adding to what Joel said, we have a procedure in place and as he mentioned each individual investment goes through a testing for impairment so we do that. Quite frankly what we did this past quarter was really to look at these funds that are not managed by our lead asset manager which is Black Rock and that’s where we had some issues. So we decided to remain very conservative and get out of those positions and that’s how come you’re seeing some realized losses but the rest of the portfolio is very, very conservative. It was only those investments, a very small part of it, that we went outside our main asset manager and that’s where we had some issues and as a result of that we decided to be more conservative and to look for investments that we could directly hold to maturity so if there are fluctuations in pricing that by holding to maturity we’re not going to be worried about the fluctuations. Those investments that we went outside of that sort of philosophy we were subjected to that volatility because these funds used leverage or used different investment techniques that ultimately we didn’t feel comfortable with.

Operator

We’ll go next to Jon Lubert with IL Hedge Investments.

Jonathan Lubert – IL Hedge Investments

I know there’s a delicate balance between using your capital to expand the business and a potential share buy back but I’ve been in this stock since your 144A transaction and now that your share price has dipped below that price of $10.50 is there any benefit to using $50 million of your $150 million of cash to buying back shares and it seems like a great investment at this time and I wanted to just get your opinion on that.

Michael

We are seeing a lot of opportunities and certainly did think about stock buy backs but let’s take a look at where we are. We started in April 2006 and it was a start up and now here we are at the end of 2007 and we’re generating approximately $45 million and our earn factor is about 66%. So we see 2008 as the year where we’re going to get the benefit of all the work that we had put into this company and we’re seeing some great business opportunities and it would be a shame to take that money that we have allocated to pursue those opportunities because of what is going on in the marketplace. So we think that the money is better utilized by taking advantage of what we see as tremendous opportunity in the marketplace and continuing to do what we have said we would do and we’re executing on all of the objectives that we had said that we would pursue when we met with our investors. So I think stock buy back is something that we’re currently not entertaining but we also look at other strategic options. If the stock continues to perform the way it has performed we think that we have other strategic initiatives that may change the course of direction that we have set out for ourselves in 2008. So I think this is a temporary situation and certainly we’re disappointed about the stock price but certainly not about our operating performance. So if there is a significant gap between our performance and investor reaction in terms of our stock price, obviously we have to do something. Right now we put out a guidance of $1.80 and as of today I believe our stock price is below book value. There’s something wrong here, there’s tremendous value and we think over time the stock will respond accordingly. So let’s wait and see what happens, but if it doesn’t pick up and if we’re not rewarded for the hard work and if we’re not rewarded for the value of our franchise certainly we’re thinking about other strategic initiatives that would deliver that value to our shareholders. So we’re very mindful of that and we just want to wait and see and whether this is a temporary situation or this is a more permanent one and in that case I’m sure we’ll come up with something to enable shareholders to realize the value of our franchise.

Jonathan Lubert – IL Hedge Investments

I hear what you’re saying, it seems to me though that if you use $50 million we would all own 13% more shares and therefore be able to take even greater advantage of all the hard work you’ve done because we all agree as shareholders that there is value in the company. It’s just I look at it as a great opportunity to buy back stock and to take advantage of what the market’s giving us here, not as a – I can’t imagine how using that for the business operations is a better buy than the stock right now, but that’s the way I feel.

Michael

And I appreciate your input but what I’m saying is that we have thought other strategic initiatives including stock buy back so just because we’re not responding to that right now doesn’t mean that we’re not going to respond by pursuing various strategic investments potentially stock buy back. All I’m saying is that we are projected, we are anticipating that the stock will respond to the earnings guidance that we have provided and in a normal situation we fully expect the stock to trade based on the earnings guidance we provided so we want to wait and see and if that does not occur I agree that we have to pursue other strategic initiatives and at that point we will consider those initiatives including stock buy back.

Operator

We’ll go next to Brad Gendells with Cumberland Associates.

Brad Gendells – Cumberland Associates

Most of the questions I had about the investment portfolio were answered when you were responding to Bijan but I guess I’d like to focus just for a moment on the equity allocation. You described in some detail what you were doing with fixed income securities, did all that apply to the equity as well? What kind of diligence process have you done on those securities, etcetera?

Joel

I’d say, Brad, diligence process is very, very similar and at the moment the only equity securities we have are the stocks that invest in REITs and we also have some preferred stocks in a US company that given this type of dividend and we constantly look at it, all the time and we’re all over the investment managers asking them the same tough questions that you would expect us to ask to make sure that their creditworthy and that we’ll recover.

Michael

Just to add to what Joel said certainly our philosophy is to put substantially all of our investment into fixed income bonds and we have done that and I think we saw how we deviated off of that a little bit in 2007 and I think that was a small portion of our investment and what Joel mentioned as the serious equities that invest and various different types of investments. Those are the types of investments that we have focused on as far as doing more critical due diligence and our due diligence indicated that we probably shouldn’t be in those types of investments and as a result we’re out of them. I think what you’ll see going forward is for us to return back to focusing on underwriting and looking at a very conservative pristine investment portfolio and that’s what we’re committed to do, are doing and I think we took the hit in the fourth quarter to be able to adhere to that philosophy going forward.

Brad Gendells – Cumberland Associates

I apologize if you had provided this number before but of the remaining investment portfolio on the fixed income side what percentage of that is mortgage related?

Greg

41%, Brad.

Brad Gendells – Cumberland Associates

41% is mortgage related and what percentage of that was agency?

Greg

$150 million of it is agency, $155, it’s $281 million total and it’s $155 million agency. It’s all AAA and none of it is subprime.

Joel

And none of it is all [inaudible] either. And none of it is leveraged.

Operator

There are no further questions at this time. I’d like to turn the conference back to our speakers for any closing remarks.

Michael

As we mentioned during this call 2007 was our first full year of operation in which we successfully executed our business plan consistent with our message to our investors. We believe our unique approach at providing a comprehensive solution, capital paper and insurance services continue to receive very strong reception from our clients. As a result of we believe we are very well positioned to continue to grow our business in 2008. I would like to thank all of you for joining our earnings call today and look forward to speaking with you again next quarter. Thank you.

Operator

That concludes today’s conference. You may now disconnect.

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